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Forex Today: US Dollar consolidates Fed-inspired gains

Here is what you need to know on Monday, September 21:

The US Dollar (USD) Index holds its ground and clings to marginal gains above 100.00 early Monday after rising more than 1% in the previous week, fuelled by the Federal Reserve's hawkish outlook. The US economic calendar will feature Chicago Fed National Activity Index data for August. Investors will also pay close attention to comments from central bank officials throughout the day.

US Dollar Price Last 7 Days

The table below shows the percentage change of US Dollar (USD) against listed major currencies last 7 days. US Dollar was the strongest against the Japanese Yen.

USDEURGBPJPYCADAUDNZDCHF
USD1.10%1.18%2.28%1.07%0.53%1.72%0.90%
EUR-1.10%0.06%1.15%-0.02%-0.57%0.62%-0.20%
GBP-1.18%-0.06%1.11%-0.10%-0.63%0.56%-0.29%
JPY-2.28%-1.15%-1.11%-1.20%-1.77%-0.62%-1.42%
CAD-1.07%0.02%0.10%1.20%-0.52%0.63%-0.21%
AUD-0.53%0.57%0.63%1.77%0.52%1.19%0.36%
NZD-1.72%-0.62%-0.56%0.62%-0.63%-1.19%-0.84%
CHF-0.90%0.20%0.29%1.42%0.21%-0.36%0.84%

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).

Analysts at Nordea highlight that the US economy “remains resilient, while inflationary pressures show few signs of easing,” and note that “with the labor market also holding up well, the case for a more restrictive monetary policy stance is strengthening.” Against this backdrop, they “maintain our forecast for two more hikes,” stressing that “we expect this hike to be delivered, followed by another hike next year, as inflationary pressures are likely to persist.” Nordea adds that “the risks to our rate outlook remain tilted to the upside,” underscoring their view that “the risks as tilted to the upside” for further Fed tightening.

Meanwhile, tensions in the Middle East remain high. Iran’s Islamic Revolutionary Guard Corps (IRGC) warned that any new military attack by the US could trigger a response fought across a different geographical area and with different weapons. Later in the week, US President Donald Trump and Chinese President Xi Jinping are due to meet to discuss trade relations.

Markets eye tentative US-China thaw as officials flag possible AI dialogue

Analysts at ABN Amro highlight that the tone around the latest US-China engagement has been more constructive than many had anticipated, noting that “the initial signs are reasonably positive amidst generally low expectations,” with US Treasury Secretary Scott Bessent and China’s Vice Premier He Lifeng meeting alongside key officials including US Trade Representative Jamieson Greer and China’s international trade negotiator Li Chenggang. According to the bank, the talks “centered around trade, investment, the Iran war, and in some signs that there might be increasing collaboration to address the risks from AI a possible US-China AI dialog,” underscoring a tentative willingness on both sides to explore cooperation on emerging technological risks.

USD/JPY climbed to its highest level in two weeks above 158.00 on Friday even though the Bank of Japan (BoJ) announced that they raised the short-term interest rate by 25 basis points (bps) to 1.25% from 1.00%. Two members of the BoJ board dissented and BoJ Governor Kazuo Ueda reiterated that they will keep raising the interest rate in response to the economy and prices.

Yen softens as BoJ hike underwhelms hawkish expectations

Analysts at OCBC note that the Yen weakened after the BoJ raised its policy rate by “25bp to 1.25%, its highest in over 3 decades.” They highlight that while the move was widely anticipated, the “7–2 vote and relatively limited guidance on the pace of further normalisation disappointed expectations for a hawkish signal,” prompting a softer JPY response despite the historic adjustment.

OCBC adds that, in the near term, “JPY may remain volatile, with UST-JGB yield differentials still an important driver,” and warns that “thin liquidity (due to JP hols on Mon – Wed) may exacerbate FX moves.” However, the bank also points out that “firmer domestic inflation and wage data, intervention risk or signs of repatriation flows could help limit JPY downside,” suggesting some potential constraints on further Yen weakness even as markets digest the BoJ’s cautious tone.

EUR/USD stays below 1.1500 in the European morning on Monday after closing the previous week deep in negative territory. Later in the session, European Central Bank President (ECB) Christine Lagarde will deliver opening remarks at the ECB Roundtable on Pontes launch in Frankfurt.

Gold corrects lower and trades near $4,350 in the European morning on Monday after managing to post moderate gains last week.

GBP/USD struggles to stage a rebound and stays below 1.3400 following the previous week's sharp decline.

Fed FAQs

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

Author

Eren Sengezer

As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.

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