Dollar rallies 1% for the week after Fed's hawkish hold

The dollar surged to its highest level in more than a year, with the ICE Dollar Index climbing 0.99 percent for the week after the Fed's hawkish hold.

The ICE Dollar Index rose 0.99 percent to 100.736 this week, its strongest weekly gain in months, after the Fed's June 18 policy statement pushed the greenback from around 99.500 to sustained levels above 100.500.

Markets now price in a 70 percent probability of a 25-basis-point rate hike this year, according to Fed funds futures data, as the central bank's Summary of Economic Projections showed fewer cuts than previously anticipated.

The Bloomberg Dollar Index climbed 0.78 percent for the week to 1216.63, with the session high reaching 1220.31. The dollar touched its highest level in more than a year during Friday trading, hitting 101.127 on the ICE gauge before paring gains to close at 100.736. The index traded near 99.500 before the Fed decision, meaning the bulk of the weekly gain occurred in the 48 hours following the release.

The rally has broad implications for global markets. A stronger dollar typically tightens financial conditions, pressures emerging-market currencies, and weighs on commodities priced in the greenback. The next Fed meeting, scheduled for late July, will determine whether the current rate path holds or shifts further.

The Federal Reserve held the fed funds rate at 5.25 percent to 5.50 percent for a seventh consecutive meeting, unchanged since July 2025. The decision was accompanied by a Summary of Economic Projections that raised the median terminal rate forecast, effectively reducing the number of cuts expected through 2026. The last time the Fed delivered a similarly hawkish surprise was in September 2025, when the dollar rallied 1.5 percent over the following two weeks while the S&P 500 fell 2.3 percent.

The dollar's strength comes as other major central banks face their own policy dilemmas. The European Central Bank is expected to raise rates by 25 basis points next week after Eurozone CPI accelerated to 3.2 percent in May, driven by a 10 percent rise in energy costs and an acceleration in services inflation to 3.5 percent, according to Eurostat data. The Bank of England has indicated no rush to hike given weak domestic growth, leaving the pound vulnerable to further dollar strength. Sterling has risen for four straight days toward 1.35, but the broader trend remains tied to the dollar's momentum.

For emerging markets, the dollar rally poses a familiar challenge. Countries with dollar-denominated debt and large current-account deficits face increased refinancing costs and currency depreciation pressure. The MSCI Emerging Markets Currency Index has already weakened this week as capital flows shifted toward dollar-denominated assets. Past episodes of rapid dollar appreciation, such as the 2022 rally that pushed the DXY above 114, triggered stress in several frontier markets and forced central banks from Indonesia to India to intervene in currency markets.

The dollar's trajectory now hinges on incoming economic data ahead of the next Fed decision in late July. Strong job creation and persistent inflation could strengthen the case for rates remaining higher for longer, while a slowdown in growth would revive bets on cuts. Nonfarm payrolls data due next week will provide the first major test of whether the economy can sustain current rate levels. The ISM Services PMI rose to 54 in May, the strongest reading in four years, suggesting the economy continues to hold up despite elevated borrowing costs.

This article is for informational purposes only and does not constitute investment advice.