The dollar strengthened as traders priced roughly 100 basis points of additional Federal Reserve tightening, with fed funds futures implying a peak near 4.8%, pressuring EUR/USD after the Fed's first hike since 2023. The two-day Trump-Xi summit in Washington adds two-sided headline risk, with the trade truce extended two months past its Nov. 10 expiry.
The dollar extended its advance Thursday as traders raised the odds of another Federal Reserve rate increase this year, pressuring EUR/USD a week after the central bank delivered its first hike since 2023 and signaled more to come.
"The market is repricing the terminal rate, not the direction," said David Lefkowitz, head of US equities at UBS Global Wealth Management. "The debate is how much the Fed has to hike, and that debate is being settled in the dollar's favor right now."
Fed funds futures imply the benchmark rate peaks near 4.8% in a little over a year, for total tightening of just over 100 basis points, according to LSEG data. That is a fraction of the 525 basis points delivered in the 2022-2023 cycle, but it is enough to widen the rate gap that has anchored the euro's range all year. The Fed raised rates by a quarter point last week, its first increase since 2023, and signaled another move by year-end.
The euro's slide is the cleanest expression of that repricing. Europe's central bank has offered no matching hawkish turn: ECB policymaker Martin Kocher said Thursday the Governing Council will decide on rates "meeting to meeting," language that leaves the deposit rate where it is while the Fed's path steepens. Rate differentials, not growth expectations, are doing the work.
Layered on top is the two-day state visit by Chinese President Xi Jinping, who arrived Wednesday evening at Joint Base Andrews outside Washington and meets President Donald Trump at the White House on Thursday. The agenda covers trade irritants, artificial intelligence safeguards and the war in Iran, with the two sides agreeing Wednesday to extend a one-year trade truce due to expire Nov. 10 by two months.
For currency desks, the summit is a two-sided headline rather than a directional bet. Escalation would feed risk-off flows and add to dollar demand; a conciliatory outcome, particularly any softening on the $14 billion US arms package for Taiwan that Trump has called a "very good negotiating chip," would unwind part of the hike-driven bid. Peak baseline US tariffs reached 145% during last year's trade battle, matched by Chinese levies of 125%, before falling to roughly 47% after the leaders met in South Korea.
The dollar's strength carries costs beyond the currency pair. A firmer greenback tightens global financial conditions, weighing on US exporters, emerging-market assets and dollar-denominated commodities. Gold traded muted Thursday as Fed tightening prospects and a decline in oil prices removed two of its supports, while crude eased off highs as trade and peace talks progressed.
The near-term path hinges on whether the Fed validates the futures curve. Investors are factoring in further increases in 2027, and the current cycle is expected to be short and shallow relative to history: since 1983 the average hiking cycle has run just under two years with rates rising 320 basis points, according to Jefferies equity strategist Jane Gibbons.
History offers a caution. The S&P 500 has fallen a median 2.6% in the three months after the first hike of a cycle, based on six cycles since 1994 compiled by LPL Financial, with drawdowns of 8% to 14% in five of them. The 2022 exception was far worse — a 25% peak-to-trough decline — because the pace of tightening, not the first move, broke the market.
For EUR/USD, the arithmetic is narrower. The pair stays hostage to the spread between US and euro-area policy expectations until either the Fed's December meeting or a summit deliverable changes the calculus. A truce extension alone removes tail risk without reversing the hike premium; a breakdown in talks would compound it.
This article is for informational purposes only and does not constitute investment advice.
