Rate-Hike Expectations Are Surging. Why Is the Dollar Struggling to Rise?

The probability of a September rate hike has reached 58.5%, and the two-year U.S. Treasury yield has climbed to its highest since January 2025. The dollar should have strengthened alongside them. Yet on the evening of September 4, the dollar index reached 99.9 intraday before ending at 99.18, about 0.5% below its August 28 level of 99.68.

With Rate Expectations So Strong, Why Is the Dollar Not Rising?

First, we need to clarify what the dollar index measures. It does not measure the value of the dollar in isolation, but its weighted performance against a basket of foreign currencies. The euro carries a weight of 57.6% and the yen 13.6%, together accounting for more than 70%. The remaining four currencies account for less than 30% combined. The August 7 dollar article contains the full list. The index's strength depends heavily on how those counterpart currencies perform.

Three Reasons It Has Struggled to Rise

First, markets are betting that the Bank of Japan will follow with a hike, strengthening the yen. Over one week, USD/JPY fell from 160.1 to 156.2. The yen appreciated by about 2.5%, directly pulling the dollar index lower.

Second, the Fed itself has not committed to a single outcome.

- August 28: Fed Chair Warsh took a hawkish stance at Jackson Hole, prioritizing inflation. The probability of a hike briefly approached 60%.

- September 3: Fed Governor Waller, a permanent FOMC voting member, offered a more dovish view, saying rates could stay unchanged if inflation continued to fall. The hike probability returned to about 50%.

- September 4: After the payroll report, it rose again to 58.5%. Officials were sending different signals, and markets were reluctant to make a definitive bet.

Moreover, August hourly earnings rose by only 3.1% year on year, the slowest since the pandemic, while unemployment stayed at 4.1%. Employment was strong, but wages were not out of control. The argument that the labour market was overheating did not hold. A 58.5% probability is not a settled decision.

Third, with CPI still unreleased, the dollar is waiting to take a position. The Fed meets on September 15–16, and August CPI on September 11 is the final piece of the inflation picture. Markets do not want to place their bets before it is revealed.

Why Watch the Dollar?

The dollar is a yardstick for global asset pricing. Oil and gold are priced in dollars, and emerging markets carry dollar-denominated debt. If it truly strengthens, all of them come under pressure. Conversely, a dollar that cannot rise tells us that a hike is not yet a foregone conclusion, leaving gold and risk assets some breathing room. The previous article explained that gold fears the interest-rate consequences behind employment data. The dollar index is often the first flag to turn.

Three Signals to Watch Next

- August CPI on September 11: whether core monthly inflation falls in the 0.2% or 0.3% range determines whether the 58.5% hike probability moves up or down.

- Whether the dollar index can hold above 100: 100 is its 1973 baseline, and holding above it would mark genuine strength.

- The Bank of Japan's September meeting: if Japan does raise rates, synchronized moves in global rates would leave this part of the dollar index under pressure.

The dollar is not refusing to rise; it is waiting for a reason. The September 11 CPI report is that reason.