The US Dollar just hit a 19-month high — and the Fed isn't done

The US Dollar has recovered most of what it lost after the 2025 tariff shock, and the Federal Reserve has raised interest rates only once. Traders expect three or four more increases by late 2027, and the Dollar's price already assumes all of them.

The US Dollar Index, which measures the Greenback against six major currencies, is trading at its highest level since April 2025, the month the US tariff announcement sent it lower. That fall ended in late January, and the index is up about 8% since. The Federal Reserve (Fed) has raised interest rates once since then.

One increase is not much central banking for an 8% rally. The rest comes from increases that haven't happened yet: futures tied to the Fed's rate, which is where traders bet on it, show three or four more quarter-points by September 2027. The Dollar has been bought on all of them in advance, so the 19-month high depends on a Fed that has so far promised none.

One hike, one pause and a 19-month high

The Fed cut rates three times in late 2025, and the Dollar Index reached its low in January. On September 16, the Fed raised its rate by a quarter-point to 3.75%-4.00%, its first increase since 2023. Six weeks later it held, with Fed Governor Cook and Cleveland Fed President Hammack voting to raise again, and Fed Chair Warsh declined to say what December would bring.

The Dollar kept rising anyway, and the reason is in the bond market. Money moves to the currency that pays the most, and what traders pay for is the rate they expect over the next couple of years. The two-year Treasury yield, the interest the US government pays to borrow for two years, is the running estimate of that. It rose to about 4.7% after Tuesday's inflation report against a Fed rate whose upper limit is 4.00%. That gap is the part of the rally the Fed hasn't delivered yet.

An inflation report with its headline missing

The Consumer Price Index (CPI), the government's main measure of what households pay, rose 0.4% in October after 0.6% in September. It beat the forecast for a third straight month, and prices excluding food and energy rose 0.3%. The Bureau of Labor Statistics (BLS) couldn't publish the usual 12-month rate, because a government shutdown meant nobody collected prices in October 2025. Traders now treat a December increase as certain on a report whose best-known number doesn't exist.

Employers added 165K jobs in October and unemployment is 4.1%, so the jobs data gives the Fed no reason to wait. Fed Governor Christopher Waller said on Tuesday that he would back a quarter-point hike in December whatever the report showed. He added that a half-point should be considered if prices excluding food and energy rose 0.3% or more, and the report arrived the same day at exactly 0.3%.

Since then, the argument among officials has been about size. Cleveland Fed President Hammack said on Thursday that she prefers smaller, steadier increases to a half-point. Chicago Fed President Goolsbee described the report as close to disturbing and did not say how he would vote. Each remark adds to the rate traders expect, and the Dollar Index has broken above its October high since Tuesday.

Futures put the midpoint of the Fed's rate at 4.15% after the December 9 decision, up from 3.88% now. That is a full quarter-point plus roughly a one-in-eight chance of a half. They put it at 4.73% by September 2027. In early November, the same futures had the Fed stopping near 4.25%, so nearly two extra increases were added in about a week.

The ECB has hiked twice and the Euro still fell

The Euro is 57.6% of the Dollar Index, so a 19-month high in the index is mostly a Euro at its lowest since May 2025. The European Central Bank (ECB) has raised rates twice this year, in June and September, to the Fed's once. Eurozone inflation is 4%, and ECB Chief Economist Lane has said another increase in December would be prudent if the data hold. The central bank that has raised rates twice has the weaker currency.

The gap in rates explains it. The ECB's deposit rate is 2.50% against the Fed's 3.75%-4.00%, and some banks expect the ECB to stop after December while the Fed keeps going into 2027. ECB President Lagarde is also leaving on February 7, nine months before her term ends, and a successor has not yet been appointed. A wider gap in the Fed's favour means a lower Euro, and a lower Euro is most of a higher Dollar Index.

Other currencies have moved less. The Fed's own broader index covers 26 currencies, including the Chinese Yuan and the Mexican Peso. At its last reading on November 6, it was about where it stood a year earlier, and still 3.6% below its level on the day of the tariff announcement. The Yen, the second-largest weight in the Dollar Index, is near levels where Japan's government has stepped in before. The Bank of Japan (BoJ) is also expected to raise rates as soon as December. Most of the index's rise is the Euro's fall, and the ECB meets in December too.

Three or four hikes from a chair who has promised none

December 9 is the fork. A quarter-point with no signal about January is what futures already assume. There is nothing new in it for the Dollar, and the three further increases behind the rally become a guess. The index fell for a week after the Fed held in October, when less was expected.

A half-point, or a quarter-point, with Fed Chair Warsh saying more will follow, raises the expected peak again. The index would then have the last tenth of its tariff fall left to recover, and the Euro's direction would depend on whether the ECB matches the Fed or stops.

Three releases come first. The Producer Price Index (PPI), which tracks the prices businesses pay, is due on Friday with a forecast of 6.6% from a year earlier, up from 6.3%. Retail Sales follow on November 17 with a forecast of no growth after 0.8%. The minutes of the October meeting, due on November 18, will show how many officials came close to joining the two who voted to raise. A PPI at or above forecast keeps the two-year yield above the Fed's rate, which is what the rally depends on.

The lean is with the Dollar while the data keeps beating forecasts and Fed officials keep arguing over the size of the next move. The case is wrong if the Fed raises in December and signals a wait, or if the ECB raises and signals it will keep going. Either one narrows the rate gap that has been bought. Futures show 3.4 more increases, and Fed Chair Warsh has so far committed to none.