On Tuesday, September 22, 2026, the U.S. Dollar index traded above 100.5, near its highest level since July. The dollar’s strength has been largely supported by the Fed’s recent decision to raise interest rates by 25 basis points to 3.75%-4.00%. It marked the first increase since July 2023 and came amid persistent inflation, an oil shock fueled by renewed U.S.-Iran tensions, and stronger economic data.
Alongside the hike, the Fed signaled that the fight against inflation is far from over. The market is pricing in another rate increase in October, with the probability rising from 43.5% a week ago to 56%. Expectations of higher rates are providing further support to the dollar, making dollar deposits and short-term U.S. Treasuries comparatively more attractive to investors.
Currency markets react to higher rate expectations
Against this backdrop, USDJPY traded around 157.50, keeping traders alert to possible intervention to support the yen. Last week, the Bank of Japan raised rates, a move that also affected the currency. Meanwhile, EURUSD stayed around 1.14, and GBPUSD held near 1.33. Sterling traded near a two-month low as investors digested developments in the Middle East and UK public finances coming in weaker than anticipated. The latest release showed that the budget deficit exceeded analyst forecasts, reaching £18.3 billion in August.
The previous oil shock, which pushed oil prices above $100 and was driven by renewed attacks in the Strait of Hormuz, along with a temporary disruption to Saudi Arabia’s East-West pipeline, now appears to be easing, potentially reducing inflationary concerns. Oil prices have since declined, with WTI crude falling to around $91 per barrel on September 22 and Brent crude trading below $100. The decline was supported by improving sentiment around Gulf supply. U.S. President Donald Trump has said he expects prices to fall sharply once the war is over. While diplomatic efforts continue - with Iran offering to reopen the Strait of Hormuz if the U.S. lifts its blockade - he has predicted that the conflict will end no sooner than November, when the U.S. midterm elections take place.
What could drive the dollar next?
For now, investors are closely watching the DXY’s next moves. If the uptrend persists, the index could reach a fresh seven-week high. Conversely, a decline below the 100 mark could suggest that falling oil prices and Treasury yields are exerting a stronger influence than the Fed’s hawkish stance. Expectations for another rate increase could strengthen or fade depending on upcoming Federal Reserve speeches and economic data, with softer-than-expected figures likely to reduce the probability of another hike.
This article was written in cooperation with TradingView