Dollar Hits Seven-Week High as Hawkish Fed Turns Focus to BOJ

The dollar held at a seven-week high on Thursday after the US Federal Reserve raised interest rates and pointed to further increases in the months ahead, leaving investors to weigh decisions from the Bank of England later in the day and the Bank of Japan on Friday.

The greenback advanced in tandem with US Treasury yields after new central bank chief Kevin Warsh joined a unanimous vote to lift rates, with officials endorsing a hawkish trajectory and projecting one more increase in 2026.

"(Warsh) definitely sounded more hawkish than expected, and the fact that he provided guidance on future hikes surprised the markets, causing them to reprice policy higher, which ultimately pushed the dollar higher," said Carol Kong, a currency strategist at Commonwealth Bank of Australia. "Our outlook is for the dollar to appreciate because of our view on the FOMC."

The dollar index, which tracks the greenback against a basket of currencies, last stood at 100.33, its strongest since July 31. The euro traded at $1.1456, close to a seven-week low, while sterling was little changed at $1.3377 before the Bank of England's meeting. The yen hovered near a two-week low at 156.20 per dollar as markets awaited the Bank of Japan's decision.

Among other currencies, the Australian dollar fetched $0.7096 and the New Zealand dollar was flat at $0.5713. Rate futures markets now imply roughly a 90% chance of a follow-up quarter-percentage-point Fed hike by the end of this year, according to CME Group's FedWatch Tool.

Attention is now fixed on the Bank of Japan, which is expected to raise interest rates to a 31-year high on Friday and signal its readiness to keep pushing borrowing costs higher, joining other major central banks in combating persistent inflation pressures driven by soaring oil costs. Markets will also watch for any hints from Governor Kazuo Ueda on the timing and pace of further increases.

"The bigger question is how Governor Ueda frames the path beyond September, particularly whether the BoJ signals a faster pace of normalisation amid still-elevated inflation," analysts at OCBC said in a note.

The decision could prove a key test for the yen, which climbed to a seven-month high against the dollar last week as speculative positions flipped to net-long bets on growing conviction in the Bank of Japan's tightening path. Japanese retail investors have kept stubborn short positions, however, expecting the yen's recent gains to fade.

In cryptocurrencies, bitcoin was flat at $76,562.25.