The US Dollar has regained momentum following the Federal Reserve's first rate increase since 2023, with changing interest-rate expectations driving significant moves across major global currencies. The Euro and Sterling remain under pressure, while the Chinese Yuan continues to demonstrate unusual resilience and the Japanese Yen remains highly volatile.
The Dollar Index stands at 100.63, up 2.35% year-to-date and 1.85% over the past month. The Federal Reserve's hawkish rate increase has been the primary catalyst, with markets now pricing three additional hikes by mid-2027.
Technical momentum has also strengthened, with the Dollar Index attempting to move through its 55-day moving average and short-term sentiment indicators turning bullish.
The Dollar's medium-term position nevertheless carries an important risk. Global pension funds and insurers reportedly hedged only 41% of their foreign-currency exposure as of June 30, the lowest level since at least 2015. This leaves the currency potentially vulnerable to a sharper reversal should market sentiment change.
The Euro is the weakest of the major G10 currencies covered. EUR/USD trades at 1.1435, down 2.09% over the past month and 2.65% year-to-date.
The decline reflects the widening interest-rate differential between the US and Eurozone. While the ECB is also tightening, markets currently view the Federal Reserve as pursuing the more aggressive cycle. The energy shock creates an additional challenge for the Eurozone by simultaneously increasing inflation and weakening economic growth.
Sterling is also under pressure, with GBP/USD at 1.3328, down 2.32% over the past month and 0.94% year-to-date. Despite expectations for additional Bank of England rate increases, the Pound has failed to benefit materially as investors focus increasingly on the UK's stagflationary economic outlook.
The Chinese Yuan is the standout performer. USD/CNY trades at 6.7017, representing a 4.10% year-to-date appreciation of the Yuan against the Dollar. This resilience contrasts sharply with the broader pressure the Fed's tightening cycle has placed on non-Dollar currencies.
The Yuan's performance reflects active PBOC management, China's current-account surplus, and deliberate efforts to maintain currency stability. Implied volatility also remains exceptionally low, consistent with China's managed exchange-rate regime.
The performance is particularly notable given the approximately 330-basis-point gap between Chinese and US 10-year government bond yields, which strongly favors the Dollar from a carry perspective.
The Japanese Yen remains the most volatile major currency. USD/JPY trades at 157.70 and has fluctuated between approximately 154 and 160 during September alone.
The Bank of Japan raised its policy rate by 25 basis points to 1.25% on September 18, but the Yen weakened after the decision as markets were disappointed by the lack of clearer forward guidance. Two board members dissented, while the BOJ subsequently conducted a rate check, keeping intervention concerns elevated.
Japan and the US also reportedly conducted coordinated foreign-exchange intervention earlier in September, with Japan selling approximately $87.8 billion in foreign securities to finance the operation.
The one-year USD/JPY forward implies a level around 152.89, reflecting the changing interest-rate relationship as the Bank of Japan normalizes policy. One-month implied volatility remains the highest among the major currency pairs covered.
Overall, foreign exchange markets continue to be shaped primarily by diverging monetary policy cycles. The Federal Reserve's renewed tightening has strengthened the Dollar against the Euro and Sterling, while active policy management has supported the Yuan and the Yen remains caught between Bank of Japan normalization and continued intervention risk.
