The US Dollar strengthened broadly against major currencies following a hawkish outlook from the Federal Reserve, impacting the New Zealand Dollar (NZD), Canadian Dollar (CAD), and Euro (EUR) [1][2][3]. Fed Chair Kevin Warsh emphasized that inflation remains 'uncomfortably high' and recent economic data has not shown meaningful structural progress, prompting a swift adjustment in market expectations for further rate hikes [1]. The CME FedWatch tool showed that the probability of a rate hike at the October Fed meeting rose to 53.1%, up from 44% the previous day [1].
In the NZD/USD market, the New Zealand Dollar depreciated to around 0.5720 during early European hours on Friday, reversing gains from the previous day as the US Dollar recovered [1]. Despite this, investors are pricing in a 60% chance that the Reserve Bank of New Zealand will raise its official cash rate to 3.0% at its upcoming October policy review [1]. New Zealand's trade balance for August showed a deficit of NZD 1.35 billion, an improvement from July's NZD 2.12 billion gap but missing expectations of a NZD 1.275 billion shortfall. Exports rose 15.4% year-on-year to NZD 6.66 billion, while imports increased 13.1% to NZD 8.0 billion [1].
For the Euro, Commerzbank's Volkmar Baur noted that EUR/USD stabilized after the Fed's hawkish surprise, with markets now fully pricing another Fed rate hike in December and no cuts until late next year [2]. The bank expects EUR/USD to remain near 1.15 through year-end, gradually rising to 1.18 by the end of 2027 as US policy and politics weigh on the Dollar [2]. Commerzbank also anticipates another ECB rate hike in December, which is already priced into the market [2].
The USD/CAD pair traded near 1.3995 in early European hours on Friday, with the US Dollar extending its rally against the Canadian Dollar due to the Fed's hawkish tone [3]. The Fed raised interest rates by a quarter-percentage point at its September meeting and projected one more increase later this year [3]. Scotiabank strategists highlighted that the CAD has underperformed its peers, with the Fed/BoC policy rate differential back to 175bps, contributing to CAD softness [3]. Their fair value framework suggests an equilibrium exchange rate of 1.3894, indicating some USD overvaluation, but with little prospect of the gap narrowing soon [3]. Technical analysis shows USD/CAD maintains a bullish near-term bias, supported by technical indicators [3].
Geopolitical developments also influenced market sentiment, with ongoing tensions in the Middle East potentially supporting oil prices and the CAD. Reports indicated that a Togo-flagged oil tanker was struck in the Strait of Hormuz, and US President Donald Trump is nearing a decision on whether to escalate military operations or pursue an end to the conflict [1][3]. ING strategists noted that moderating oil prices have tempered the Dollar's momentum, while political developments could be pivotal for regional risk sentiment and near-term Dollar dynamics [1].
CONCLUSION
The US Dollar's rally, driven by the Federal Reserve's hawkish outlook and rising rate expectations, has pressured both the New Zealand and Canadian Dollars while delaying Euro weakness. Market participants are closely watching central bank decisions and geopolitical developments, which continue to shape currency dynamics. The prevailing sentiment is positive for the US Dollar in the near term, with further moves dependent on upcoming policy actions and global events.