The dollar has snapped back hard, with the Bloomberg Dollar Spot Index rising about 2% across two weeks to a high not seen since July before a minor pullback. Month to date, the gauge is ahead 1.4% after slipping in July and August. The backdrop: Treasury yields pushed to fresh multi-year highs, with several maturities nearing or topping 5%, the Nasdaq 100 notched a record, and crude prices pushed higher.
Positioning and pricing line up with more upside. Options markets lean greenback positive across maturities. And while many expected the Fed to sound cautious, the central bank's hawkish turn surprised parts of the market.
Morgan Stanley reversed its long-running call for a weaker dollar in the back half of the year. FX strategists led by David Adams put it plainly: "We were wrong," adding, "We now forecast dollar strength through year-end and into 2027," citing wider rate gaps and resilient US growth.
Alex Cohen at Bank of America said the risk now is for dollar strength to persist into year end. At Citi, Daniel Tobon, who has recommended short euro versus the dollar since January, said, "The risk of new information skews more dollar positive than dollar negative in our view," and sees room for the dollar index to tack on another 1%. So far this year, the euro has fallen roughly 3% versus the US dollar.
The AI boom is part of the bull case. Amundi's Andreas Koenig, who heads global FX, put it this way: "The US is still the place where there's AI growth, they're leading the capex spending, and margins and corporate earnings are good." "There's the rate differential, which is positive, so that is supportive for the dollar."
The Fed's tougher stance, backed by strong data, has traders bracing for additional increases after the first rate hike in three years, a setup that helped drive yields to new peaks. Markets now expect around 90 basis points of additional Fed hikes over the next year.
Not everything tilts dollar positive. Big fiscal deficits, policy uncertainty, and an assertive Treasury keep the long-term picture cloudy. In recent months, Treasury Secretary Scott Bessent expanded bond buybacks to tamp down borrowing costs and supported attempts to bolster the Japanese yen, actions that were seen as dollar negatives.
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HSBC's Daragh Maher said the link between Treasury yields and the greenback is muddied by large US deficits, making the outlook tricky. "We don't think the dollar will knock it out of the park," he said.
On the other side of the Atlantic, Tobon said the European Central Bank may reach a point "that starts having negative knock-on effects, which might force them to have to reverse policy down the line," leaving the dollar better positioned against the euro. Markets are still pricing in at least one additional ECB rate increase this year.
Seasonals are a tailwind too. Over the past decade, the dollar's strongest stretch has often arrived in the final full week of September.
Speculative traders had pared back bullish dollar bets going into the Fed meeting, based on CFTC data through Sept. 15, 2026, which helps explain why the hawkish surprise hit hard. From here, the bar is high: At Manulife Investment Management, senior portfolio manager Nathan Thooft said, "If upcoming inflation, labor market or growth data show signs of cooling, the Fed may have room to dial back some of its hawkish messaging." "That could ultimately limit further upside for the dollar."
For everyday portfolios, a sturdier dollar can ripple into everything from multinational earnings to commodity prices to travel budgets. Layer in AI-led US growth, higher yields, lingering geopolitical jitters, and an ECB that may be approaching its limits, and you have a recipe many strategists say still leans toward a firmer dollar into year end, even as long-term fiscal questions keep the bigger debate alive.
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