The US dollar is gearing up for a prolonged rally. Standard Chartered analysts say the main driver of the currency’s strength was the Federal Reserve’s sudden display of principle. Fed Chair Kevin Warsh raised the funds rate by 25 basis points, openly neglecting persistent calls from Donald Trump to lower borrowing costs, setting the stage for an economic boom.
The FX market immediately reacted to the regulator’s return to independence: the dollar index gained more than 1% over the week. Warsh’s hawkish rhetoric forced traders to revise their forecasts. According to CME FedWatch, the likelihood of another rate hike at the October meeting jumped from 42% to 57%.
Strategists at Standard Chartered, led by Steve Englander, note that the Federal Reserve removed the main constraint for investors — the fear that the regulator would capitulate to the president’s administration. This partly wiped out the risk premium that had hung over the dollar after Treasury Secretary Scott Bessent’s interventions in August to rescue the bond market.
The bank underscores that investors have stopped viewing higher yields driven by the budget deficit as a dollar negative. The key condition is that the Fed must keep inflation under control. By signaling confidence in the US economy’s resilience, Kevin Warsh turned a term premium into real yield. As the analysts conclude, with one move, the regulator destroyed the main reason to sell the dollar and created the perfect case to buy it.
