A few months ago, traders were betting the Fed would be cutting rates by now. Today they're betting on a hike instead.
The dollar is the scoreboard - and it just hit a two-month high.
The Fed just delivered a hawkish hold, keeping rates in the 3.50%-3.75% range while signaling more tightening could be on the table.
Nearly half of policymakers now expect a rate hike this year on mounting inflation concerns, and a strong retail sales reading is adding fuel to those bets.
The dollar index, which tracks the dollar against a basket of major currencies, climbed to its highest level in two months. It surged 0.85% in the previous session - its biggest single-day jump in over three months.
New Fed chair Kevin Warsh kicked off his tenure with a sweeping policy review, signaling the central bank is in no hurry to ease.
Here's why: when US rates look likely to stay high or move higher, money flows toward dollars to earn the higher interest, pushing the dollar up against everything else.
Investors who once expected multiple cuts this year are now staring at an 85% market-implied chance of a Fed hike in December, according to CME FedWatch.
The hawkish shift held up even after the US and Iran signed an interim deal that would reopen the Strait of Hormuz and ease oil prices.
The catch: a stronger dollar isn't all good news.
US firms like Apple and Coca-Cola earn a big chunk of their revenue overseas, and a stronger dollar makes those foreign sales worth less once they're converted back home.
When the dollar moves, your portfolio moves with it - even if you only own US stocks. Market Briefs breaks down what currency swings actually mean for your money in five minutes a day, plus a free investing masterclass when you join.
No major currency is feeling it more than the yen, which weakened to as much as 160.76 against the dollar - its weakest level since 2024.
That move wiped out the gains Tokyo bought with its April 30 intervention. For currency traders, the US-Japan rate gap is a one-way bet - sell yen, buy dollars, pocket the interest difference.
Japanese officials have already started warning traders to back off. Chief Cabinet Secretary Minoru Kihara said the government is "ready to respond appropriately to currency moves as needed at any time."
A weak yen helps Japanese exporters by making their goods cheaper abroad, but it hurts everyone in Japan paying for imported food and fuel.
Two things matter from here:
Whether US inflation data keeps coming in hot
Whether Japan actually steps in to prop up the yen, or just keeps talking
If inflation stays hot and Japan stays quiet, the dollar's run keeps going. If either side blinks, the trade can unwind fast.
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