The US Federal Reserve raised its benchmark interest rate by 25 basis points to a range of 3.75% to 4.00% on Wednesday, marking its first rate hike since July 2023 [2][3]. This move has led to a modest gain in the US Dollar Index (DXY), which traded around 100.30 on Friday as traders assessed the implications of the Fed's decision and policy cues [2]. Market participants are now pricing in a 53.1% chance of another US rate hike at the Fed's next meeting in October, up from 44% a day earlier, according to the CME FedWatch tool [2].
The Federal Reserve's hawkish stance was echoed by strategists at OCBC, who noted that the US Dollar extended its rebound following the rate hike and a significant upward revision in the Fed's dot plot projections [1]. The US Dollar was the strongest against the Japanese Yen, gaining 0.83% on the day [2]. Meanwhile, the Australian Dollar (AUD) outperformed its peers, trading 0.18% higher against the US Dollar at around 0.7122 during the European session [1]. The AUD's strength was attributed to comments from Reserve Bank of Australia (RBA) Governor Michele Bullock, who warned of upside inflation risks and reiterated the RBA's commitment to bringing inflation down. RBA Deputy Governor Andrew Hauser also indicated that further rate hikes could be considered if necessary to return inflation to target [1].
In Asia, the Indian Rupee (INR) rebounded sharply against the US Dollar, with the USD/INR pair correcting to near 95.75 from a seven-week high of 96.10 [3]. This recovery was supported by a pause in the rally of oil prices and US Treasury yields. Oil prices eased as Saudi Arabia increased tanker loadings and aimed to restore pipeline capacity, alleviating concerns about tight energy supply following recent disruptions [3]. The 10-year US Treasury yield retreated to near 4.94% after reaching a 19-year high of 5.04% earlier in the week, with analysts at TD Securities suggesting that the Fed's increased inflation-fighting credibility and concerns about higher rates impacting growth should help keep yields contained [3].
Geopolitical developments in the Middle East also influenced market sentiment. Traders monitored news of a Togo-flagged oil tanker being struck in the Strait of Hormuz and statements from the Iranian military regarding control of the waterway [2]. Additionally, US President Donald Trump indicated he was nearing a decision on potential large-scale attacks on Iran as efforts to end the ongoing conflict continued [2].
The Bank of Japan (BoJ) also raised its policy rate by 25 basis points to 1.25%, the highest since 1995, with a 7-2 split decision. The BoJ warned of risks that underlying inflation could overshoot its 2% target [2].
CONCLUSION
The Federal Reserve's rate hike has reinforced the US Dollar's strength, while global currencies such as the Australian Dollar and Indian Rupee have responded to both domestic central bank signals and shifts in oil and bond markets. Market sentiment remains cautious amid ongoing inflation concerns, central bank policy shifts, and geopolitical tensions in the Middle East. The outlook for further rate hikes and evolving energy supply dynamics will continue to shape currency and bond market movements.