Dollar extends surge on raised Fed rate hike expectations, hits over 19-month high

The U.S. dollar surged on Wednesday to an over one-and-a-half-year high, extending gains a day after a hotter-than-expected U.S. inflation report and an aggressively hawkish chorus of Federal Reserve officials forced markets to weigh the risk of an outsized 50-basis-point rate hike next month.

The U.S. dollar index, which tracks the greenback against a basket of six major peers, climbed 0.7% to 102.89, its highest level since April 9, 2025.

Hot CPI and hawkish Fed fuel bumper hike wagers

The dollar’s sustained strength stems from Tuesday’s U.S. Consumer Price Index (CPI) report, which showed headline consumer prices rising 0.4% in October, eclipsing economist expectations for a 0.3% increase. The upside surprise effectively shattered hopes that the Federal Reserve could pause its tightening campaign.

The fundamental data was immediately amplified by explicit forward guidance from the U.S. central bank’s inner circle. Fed Governor Christopher Waller stated on Tuesday that he would support a rate increase in December even if inflation temporarily cooled, and explicitly argued that policymakers should consider a larger 50-basis-point increase if price pressures worsened.

Dallas Fed President Lorie Logan echoed the hawkish sentiment, stating the central bank needed at least two more quarter-point rate increases to bring inflation under control.

Consequently, financial markets have rapidly repriced the Fed’s year-end trajectory. According to the CME FedWatch tool, traders are now pricing in a 91% probability of a 25-basis-point increase at the December meeting, up from 84% on Monday. More notably, the probability of a bumper 50-basis-point hike has now risen to 10%, generating a severe yield premium that continues to propel the greenback higher.

"The December FOMC meeting feels so far away that enough can ’happen’ between now and then to deter the Fed from hiking at all, even though the baseline view should be a single 25bp hike," Thierry Wizman, global FX and rates strategist at Macquarie, said.

"Two things that could still deter the Fed from hiking in December (or certainly deter a 50bp hike) are (1) a U.S. government shutdown, and (2) further declines in the price of oil on ’peace’, and (3) a further sell-off in stocks, if the AI story worsens," he said.

"Indeed, late yesterday, Governor Michelle Bowman made the first Fed comments about the recent AI-related sell-off, by saying that she sees a risk of a (further) sell-off in equities," Wizman added.

Euro slips as Aussie languishes near seven-month lows

The dollar’s sustained yield advantage exerted heavy downward pressure across the foreign exchange market.

The euro dropped 0.6% to $1.1092, struggling to mount any meaningful recovery after suffering a 0.5% drop on Tuesday.

Looking ahead, currency desks are pivoting their focus to a raft of European macroeconomic data due later this week, including a preliminary reading of third-quarter Eurozone gross domestic product (GDP), UK GDP figures, and a slate of speeches from European Central Bank policymakers led by President Christine Lagarde.

Meanwhile, the risk-sensitive Australian dollar slipped 0.2%, unable to recover after plummeting nearly 1% to a seven-month low in the previous session.

The Aussie remains caught in a tight macroeconomic vice, battling the headwind of soaring U.S. Treasury yields while relying on cheaper global oil prices to eventually improve the terms of trade for energy-importing Asian economies.

Ayushman Ojha and Anuron Mitra contributed to this article