Dollar rally hits 1-month high as traders boost Fed hike wagers

What happened this week

For the week, the Bloomberg Dollar Spot Index added 0.7%, its biggest gain since Oct. 2.

A softer-than-expected producer price report briefly knocked the greenback before it bounced to its highest mark since May 2025 on Friday. "It's been a near perfect storm for the dollar," said Alex Cohen of Bank of America, pointing to two weeks of stronger labor and inflation readings that have led Fed officials to a more hawkish tilt.

What moved markets

On Tuesday, traders upped wagers on additional rate increases in 2027 and began assigning a small probability to a 50 basis point hike in December. That shift followed a third straight CPI overshoot and comments from Fed Governor Christopher Waller that he would back a half-point move if inflation keeps accelerating.

That repricing pushed yields up and provided support for the dollar. Two-year Treasury notes - typically most responsive to Fed policy - logged their largest Tuesday-plus-Thursday increase since March 2023, and 10-year yields recorded their biggest climb since April 2025. "There has been a significant increase in US front-end yields and front-end rate differentials between the dollar and the G-10 currencies following the CPI data," said Shaun Osborne at Scotiabank.

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FX and rates snapshot

The dollar advanced against most major peers Friday. The yen held near unchanged, sitting just below 160 per dollar - a level that previously spurred Japanese authorities to step in - after a brief move above 160 on Thursday, marking the first such break since September.

Cohen added that the setup "continues to favor further dollar upside beyond this week's moves."

Why it matters for your portfolio

In plain English: stronger US data and a more hawkish Fed are widening short-term rate gaps with other major economies, a tailwind for the dollar. A firmer dollar often pressures non-US assets and dollar-priced commodities, while higher front-end yields raise discount rates across equities and credit. The bottom line: if this dollar momentum persists, rate-sensitive sectors and international exposure will feel it.

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