Dollar Facing Broad Competition From G7 Central Banks

MACRO FRAME

Today’s FOMC’s decision is the focal point for every asset class. The setup is unusually split: markets are pricing a hike (to a 3.75%–4.00% target range from the current 3.50%–3.75%) as Iran-conflict-driven oil gains pushed headline and producer prices higher, though a Reuters poll of 93 economists taken September 4–9 still had roughly 70% expecting the Fed to hold rates steady through year-end. The Bank of England follows on Thursday (expected hold) and the Bank of Japan concludes its own meeting Friday, September 18, with a hike to 1.25% widely expected.

STOCK INDEX FUTURES

Equity futures head into decision day higher, though the December S&P 500 essentially remains flat from a week ago but still well off the September 3 high of 7,766.50 and comfortably above the local September 10 low of 7,585.50. Nasdaq 100 futures are down on the week from their September 8 high of 29,764.75. The cash indexes strung together four straight lower closes into September 9 as $100+ oil and a hotter-than-hoped core CPI print revived hike bets, then extended losses on September 13. Expect the widest intraday to come at 1:00 p.m. CST and during the press conference, with the new dot plot likely to matter as much as the decision itself for the path of futures into year-end.

Watch point: Despite tech volatility, the earnings backdrop suggests bullishness, though a September rate hike remains a near-term risk.

CURRENCIES

US DOLLAR: The USD index is holding its recent gains at 99.73 having gained for five straight sessions as traders positioned for a hike. That’s a round trip from the September 9 low near 98.77, hit just after the CPI report, when an in-line headline briefly cooled hike bets before accelerating core CPI and a hot PPI print pulled the index back up. The dollar is gaining against nearly every major counterpart this week even as the underlying trend in inflation gauges would otherwise support a hold from the Fed.

Watch point: The market expects a hike today, though the event of no move in policy leaves substantial downside risk for the dollar.

EURO: The euro is little changed at $1.1535. as broad dollar strength has outweighed a hawkish ECB hike. The ECB raised its deposit rate 25 bps to 2.50% on September 10, its second hike this year , explicitly citing an energy-driven inflation rise tied to the Iran conflict, and Lagarde called the move “a no-brainer” while leaving the door open to more tightening; markets are now pricing more than three additional hikes over the coming year. Even a hawkish central bank hasn’t been enough to dampen the euro’s slide against a dollar that’s catching its own hawkish repricing bid into the Fed.

Watch point: Broader price direction will be subject to Fed-ECB policy expectations, which has been favorable to the dollar in advent of a hawkish repricing in Fed policy expectations the near-term.

BRITISH POUND: Sterling is 0.12% lower at $1.3458, its weakest level since early August, down from roughly, squeezed from both sides: dollar strength ahead of today’s Fed decision and a Bank of England that is widely expected to hold rates on Thursday, a day after the Fed moves. With the BoE on hold, sterling has little of its own to lean against this week and is trading largely as a pure dollar-strength story.

JAPANESE YEN: The yen is little changed at 155.19 yen per dollar, in the upper half of a volatile two-week range. Speculation about fresh intervention and rising bets on a Bank of Japan hike, have strengthened the currency as of recent. It has hovered around 155 in recent days as the broad dollar found its footing into the Fed decision. The bigger story is structural: Tokyo spent a record ¥15.4 trillion (~$98.7bn) on intervention between July 30 and August 26, and a Reuters poll now sees the BOJ hiking to 1.25% at Friday’s meeting and to 1.75% by Q2 2027, both faster than previously expected. That BOJ meeting, two days after the Fed, is arguably the more consequential JPY catalyst this week. Failure to hike at the September meeting would renew pressure on the currency and send the yen back toward the 160 area.

Watch point: Failure to raise rates at the Bank of Japan’s September meeting could see the yen drop toward the 160 level.

AUSTRALIAN DOLLAR: The Aussie is little changed at $0.7132, tracking the broadly stronger dollar and softer risk appetite as oil-driven inflation angst weighs on global equities. The RBA left its cash rate at 4.35% at its August 12 meeting, by its own account a straight hold-versus-hike debate, not a cut discussion, after June labor data showed a still-robust market (employment +76,300, unemployment 4.4%, participation up to 67.0%), consistent with a cautious, higher-for-longer stance. The RBA’s next decision isn’t until September 28–29, so AUD is essentially a dollar/risk-sentiment proxy this week, with today’s Fed decision the dominant near-term driver. However, Q3 inflation figures will continue to serve an outsized role in determining RBA policy and given that the September policy meeting is a month before the release, policymakers could wait until that data arrives before making any decisions.

Watch point: August’s hiring figures argue for a higher-for-longer stance, leading the focus to Q3’s inflation data.

TREASURY FUTURES

Yields are lower across the curve ahead of today’s decision. The 10-year note yield has fallen below 5.00% after hitting its highest level since 2007and is up roughly 17 bps from just a week ago. The move has been led by the front end: the 2-year yield has jumped to roughly 4.64% from about 4.39% a week earlier, a 25 bp repricing that captures the market’s shift toward pricing a hike rather than a hold today. The long end has moved too, if less dramatically: the 30-year yield is at 5.36%, up 10bp on the week from 5.26%.

That’s the market’s read on the actual tension the Fed has to resolve today, and it lines up with the inflation data: various measures of underlying inflation suggest August saw the ongoing improvement that might have justified leaving rates on hold. The Cleveland Fed’s 16% trimmed-mean CPI, which excludes outliers in both directions, held at 2.6% year-over-year in August — unchanged from July and its lowest reading since early 2021. Atlanta Fed sticky-price CPI — items that are costly to move and rarely decrease — also slowed, to a 3.1% annualized pace in August from 3.5% in July, with the year-over-year rate at 2.7%. Median CPI told the same story, easing to 2.6% year-over-year from 2.7% in July. The one exception is the Fed’s “supercore” measure, services inflation excluding housing, which rose slightly to 3.0% year-over-year in August from 2.8% in July, back to the upper bound of its recent 3%-ish range. So steady, if painfully slow, disinflation continues in the trend measures — but it’s being overshadowed for now by a genuine energy shock: WTI and Brent crude both topped $100/barrel in early September for the first time since May as the Iran conflict widened, and producer prices accelerated to 5.4% year-over-year in August from 4.8% in July, with headline CPI holding at 3.4% year-over-year. That combination, improving trend inflation alongside an energy-driven headline shock, leaves a risk that today’s decision a genuine toss-up rather than a sure-hike as implied by markets.

Watch point: While markets are sure about a rate hike today, recent inflation data would have otherwise supported a hold from the Fed if Warsh had withheld hawkish commentary in Jackson Hole.

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