The Dollar Index Tops 101: What Is Driving This Rally?
From 99 to 101: the market's answer, 21 days later
At the start of September, the dollar index was still hovering around 99. It has now climbed above 101. Just 21 days ago, markets were asking: “With rate-hike expectations this strong, why isn't the dollar rising?”
The focus has moved beyond a single policy decision to how the future U.S. interest-rate path will evolve.
The dollar trades on the future path, not a single rate increase
The Fed raised rates by 25 basis points in September. That may look like one policy adjustment, but the newly released interest-rate projections were what really changed expectations. Of the 18 participants, 16 believed rates would be higher than their current level by the end of 2026. The median year-end 2026 federal funds rate projection also rose from 3.8% in June to 4.1% in September.
This shows that the market is not simply asking whether rates will rise at this meeting. It is asking where rates will go over the next few meetings. Changes in expectations for that path are an important driver of the dollar.
Why did the yen fail to rise after Japan raised rates?
The Bank of Japan also raised rates by 25 basis points in September, but the yen did not strengthen as a result. Looking only at the current rate differential, both countries adjusted their policy rates, so the effect might seem limited. But exchange rates compare more than a single point in time: they reflect which country's rates are expected to change more in the future.
In the United States, the future rate path was being repriced. In Japan, it was more a case of a single policy adjustment. A currency therefore does not necessarily rise when its central bank raises rates. What matters for the exchange rate is the path being repriced.
A stronger dollar reflects a reassessment of the future
This explains why the dollar responds to the Fed's projections. When markets believe the future U.S. rate path may be higher, the expected returns on dollar-denominated assets rise too. Global capital then reassesses the relative appeal of assets denominated in different currencies.
A stronger dollar does not simply mean a stronger U.S. economy. It means markets regard the U.S. interest-rate path as relatively more attractive over the period ahead. Exchange rates price differences in future paths, not just current rate differentials.
This also explains why, during periods dominated by interest-rate expectations, the dollar often moves ahead of changes in economic data. Markets are trading the future, rather than events that have already occurred.
Two dates to watch next
Changes in the dollar affect more than exchange rates. They also influence the pricing of equities, bonds, and assets denominated in other currencies. When markets revise their expectations for the U.S. rate path, those asset prices are affected indirectly too.
First, the U.S. September nonfarm payrolls report, due on October 2.
Second, the Fed's next policy meeting on October 28.
The dollar's next move depends less on what has already happened than on how markets reprice the future.