US Dollar Hits 18-Month High as Inflation Fuels Fed Rate Hike Bets

The U.S. dollar surged on Wednesday, approaching an 18-month high after stronger-than-expected U.S. inflation data revived expectations that the Federal Reserve could raise interest rates at its October meeting.

The U.S. Dollar Index (DXY), which measures the greenback against six major currencies, gained 0.4% to 102.54 by 16:02 ET, reaching its highest level since April 10, 2025.

According to the Bureau of Labor Statistics, U.S. consumer price index (CPI) inflation increased 0.6% month-over-month in September, accelerating from August's 0.4% rise. Core CPI, excluding volatile food and energy prices, climbed 0.3%, exceeding forecasts of 0.2%.

Annual headline inflation reached 3.7%, while core inflation rose 2.6%, with both readings surpassing market expectations.

Energy costs remained a major inflation driver. Gasoline prices jumped 9.1% in September, contributing more than half of the monthly headline CPI increase. Energy prices also surged 20.4% year-over-year.

The inflation report significantly shifted Federal Reserve interest rate expectations. CME FedWatch data showed the probability of a 25-basis-point rate hike in October climbing to approximately 37%, compared with 22% before the CPI release.

Bill Adams, chief U.S. economist at Fifth Third Commercial Bank, warned that another upside surprise in September's producer price index (PPI) could strengthen the case for tighter monetary policy.

Adams also suggested that prolonged energy supply disruptions linked to the Iran war could encourage the Fed to maintain restrictive interest rates.

Meanwhile, the Federal Reserve's Beige Book indicated uneven economic activity, with only two districts reporting moderate growth and three experiencing little change.

The stronger dollar pressured major global currencies. EUR/USD fell 0.4% to $1.1154, reversing earlier gains as concerns surrounding France's fiscal deficit continued weighing on the euro.

European Central Bank President Christine Lagarde rejected expectations of emergency intervention in France's sovereign bond market, emphasizing the need for domestic fiscal reforms.

The British pound also weakened 0.4% to $1.3191.

In Asia, the Indian rupee ended its three-day rally after previously strengthening to 95.015 per dollar, despite Reserve Bank of India measures supporting currency stability.

Investors now await U.S. producer inflation figures for further clues about the Fed's next interest rate decision and the dollar's near-term direction.