Dollar Hits Two-Month High as Fed Rate Hike Bets Rise

The U.S. dollar climbed to a two-month high on Wednesday as traders increased bets that the Federal Reserve will continue raising interest rates to curb persistent inflation.

The Dollar Spot Index gained 0.2%, extending its advance after the Fed raised its benchmark rate by 25 basis points last week to a target range of 3.75% to 4%. Short-term interest rate markets were pricing roughly a 55% chance of another increase in October.

Currency markets were also cautious ahead of Chinese President Xi Jinping’s arrival in Washington for high-level talks with U.S. President Donald Trump. Trade, artificial intelligence and rare earth supplies are among the major issues surrounding the summit.

The euro dropped 0.3% to its weakest level since late July. Alongside expectations for tighter U.S. monetary policy, the currency faced pressure from European political uncertainty and concerns that low natural gas inventories could contribute to renewed energy inflation during the winter.

The Japanese yen weakened 0.2% to around 157.58 per dollar, remaining close to recent lows. Traders continued watching for signs that Japanese authorities could intervene to support the currency.

Meanwhile, the Australian dollar fell 0.25% after preliminary September PMI data indicated that manufacturing activity had slipped into contraction, potentially complicating the Reserve Bank of Australia’s outlook for further rate increases.

Brown Brothers Harriman strategist Elias Haddad said U.S. economic outperformance could continue supporting the dollar even as other major central banks tighten monetary policy.

Foreign exchange markets also received some relief from falling oil prices, with crude dropping below $100 per barrel amid improving supply conditions and signs of diplomatic progress involving the U.S. and Iran.

Attention now turns to the Trump-Xi summit, where discussions are expected to include the U.S.-China tariff truce, AI cooperation, rare earth exports and agricultural trade. The existing trade truce is due to expire on November 10.

For currency traders, the combination of Federal Reserve policy expectations, U.S. economic data and U.S.-China relations is likely to remain central to the dollar outlook.