U.S. Dollar Hits Eight-Week High After Fed Rate Hike

The U.S. dollar climbed to its highest level in nearly eight weeks on Monday, extending gains after the Federal Reserve delivered its first interest rate hike in more than three years. The Japanese yen remained under pressure following the Bank of Japan’s latest tightening move, while the euro weakened amid political developments in Germany.

The U.S. dollar index, which measures the greenback against six major currencies, rose 0.2% to 100.43 at 16:58 ET, marking its strongest level since July 29.

Central bank tightening has dominated currency markets this month, with the Fed, European Central Bank and Bank of Japan all raising rates as policymakers respond to inflationary pressures linked partly to higher energy costs.

Fed Chair Kevin Warsh said inflation remained too high after the Federal Open Market Committee unanimously lifted the federal funds rate by 25 basis points to 3.75%-4.00%. The Fed’s updated economic projections also showed at least 12 policymakers expecting another rate increase this year.

Northwestern Mutual Wealth Management CIO Brent Schutte said the U.S. economy’s resilience likely gave the Fed confidence to tighten policy, although he cautioned that higher borrowing costs could eventually slow economic growth.

The euro slipped 0.2% to $1.1463 after weekend projections showed the Alternative for Germany securing first place in northeastern state elections. The result increased attention on political uncertainty facing Chancellor Friedrich Merz’s conservative-led coalition. Deutsche Bank strategist Jim Reid said the outcome does not immediately alter national policy but highlights continued political polarization in Germany.

Meanwhile, the Japanese yen extended its recent decline, with USD/JPY rising 0.3% to 157.36. Japanese markets were closed Monday for a national holiday, reducing liquidity and increasing traders’ sensitivity to possible currency intervention.

The Bank of Japan raised its policy rate Friday to a 31-year high of 1.25%. However, two dissenting votes and Governor Kazuo Ueda’s cautious messaging contributed to yen selling. Reports that the BOJ conducted foreign-exchange “rate checks” also fueled speculation that Japanese authorities could intervene if the yen weakens further.