The Federal Reserve signals continued interest rate hikes; the U.S. dollar posts its largest single-week gain in over three months.

According to Zhitong Finance APP, after the Federal Reserve signaled that further interest rate hikes may continue in the future, the US dollar strengthened significantly this week, marking its largest weekly gain in over three months. Strong US economic growth and the Fed's continued stance on fighting inflation have provided important support for the dollar.

The Bloomberg Dollar Spot Index rose by 1.1% this week. The Federal Reserve raised interest rates for the first time in more than three years this week and also signaled that further tightening of monetary policy could follow. JPMorgan, Standard Chartered Bank, and Brown Brothers Harriman believe that this policy action has eliminated a key hurdle that previously limited the dollar's further appreciation.

From a technical perspective, the Bloomberg Dollar Spot Index fluctuated around its 200-day moving average on Wednesday and Thursday, and closed slightly above this key technical level on Friday. Historical trends show that once the dollar index breaks above the 200-day moving average on a daily close, further gains often follow. In both March and June this year, the index rose further after breaking above the 200-day moving average.

Originally, the dollar was also set to record its biggest weekly gain since the outbreak of the Iran war in March, but as the yen regained some ground on Friday, the dollar's gains narrowed. Earlier, reports emerged that the Bank of Japan had made a rate inquiry, a move the market often interprets as a sign that Japanese authorities may be preparing for official currency market intervention.

Steve Englander, Co-Head of FX Research and Head of North America Macro Strategy at Standard Chartered Bank in New York, said that this 25-basis-point rate hike appears to have removed a major concern that had previously prevented investors from buying the dollar—namely, fears that Fed Chair Walsh might avoid raising rates due to President Trump's stance.

Englander argues that this rate hike has not only alleviated concerns about being long on the dollar, but also increased the risks of shorting the dollar. He expects that with the 10-year US Treasury yield possibly rising to 5.5% over the next 12 months, the path for further strengthening of the dollar is now clearer.

It is worth noting that before this week's Fed interest rate decision, speculative forex investors—including asset management firms and non-commercial traders—had been trimming their dollar long positions for some time. According to data released by the US Commodity Futures Trading Commission (CFTC) on Friday and compiled by Bloomberg, as of the week ending September 15, bullish dollar positions had declined for the seventh consecutive week.

Nevertheless, the market remains divided on whether the dollar can break this year's high. Elias Haddad, Global Market Strategy Director at Brown Brothers Harriman, stated that other major central banks are also tightening monetary policy, which limits the potential for further policy divergence between the US and other economies. Thus, it may be difficult for the dollar to reach a new cyclical high.

Currently, the Bloomberg Dollar Spot Index is still about 1.9% below the 2026 high set on June 24. Risk reversal indicators show that options traders expect the dollar to strengthen moderately over the next month, but the gains implied by the options market remain well below what would be needed to push the dollar index to a new yearly high.

However, the US economy's growth advantage over other major economies may continue to support the dollar. Haddad pointed out that next week’s release of the September S&P Global Purchasing Managers’ Index (PMI) is expected to show that US economic growth remains ahead of the eurozone, the UK, and Japan.

JPMorgan foreign exchange analyst Pat Locke believes that, based on multiple measures such as interest rate differentials, the dollar was undervalued by about 2% to 4% before this week's Fed meeting. As the market begins to price in the possibility of further Federal Reserve rate hikes, the dollar is experiencing a "catch-up" in valuation, with gains particularly pronounced against lower-yielding currencies.