Dollar hits 2-month high as Fed hawks circle; Norges Bank hikes, franc slips

The US dollar extended its rally to a fresh two-month peak on Thursday, propelled by expectations of additional Federal Reserve rate hikes after robust economic data and a hawkish policy shift. The greenback's strength rippled across Asian and European currency markets, with the Swiss franc sliding and the Norwegian crown gaining after its central bank raised rates.

What drove the dollar's latest surge?

Strong US business activity data reignited inflation concerns, pushing two-year Treasury yields to their highest since May 2024. The Fed raised rates last week and signalled further tightening, with Chair Kevin Warsh emphasising the central bank's independence despite pressure from President Donald Trump for lower borrowing costs. This hawkish stance has eased worries that a Warsh-led Fed would soften on inflation, a prospect that could have weighed on US assets.

“Very strong US PMIs, higher oil prices and soft risk sentiment have all contributed to the bullish narrative, although the move is starting to look stretched relative to fundamentals,” said Francesco Pesole, forex strategist at ING. He cautioned that any upside surprise in upcoming US data could prompt markets to fully price in an October hike, further propping up short-term rates.

Swiss franc falls after SNB holds rates

The Swiss franc dropped 0.26 per cent against the dollar to 0.8273, reversing an earlier rise, after the Swiss National Bank (SNB) left rates unchanged as expected. The SNB reiterated its willingness to intervene in the foreign exchange market, though it tempered its tone slightly following the franc's recent weakening. The currency touched 0.8283, its lowest level since May 2025.

“Forex intervention would be the first tool out of the toolkit to address a stronger franc,” said Jack Allen-Reynolds, chief euro area economist at Capital Economics, adding that the franc could strengthen in the event of a global equity sell-off next year.

Norwegian crown rises as Norges Bank hikes again

The Norwegian crown gained 0.42 per cent to 9.471 per dollar after Norges Bank raised its policy rate by 25 basis points to 4.50 per cent and signalled a possible further hike. Unlike many central banks focused on energy prices, Norges Bank remains focused on domestic inflation, which has been above target for several quarters.

“Differently to other central banks, mostly concerned about rising energy prices, the Norges Bank's focus remains squarely on domestic price pressures and inflation having been stuck above target for several quarters,” said Giada Giani, economist at Citi, describing Norges Bank as the most hawkish in advanced economies.

Yen on track for fifth straight daily fall

The yen weakened 0.28 per cent to 158.75 per dollar, its highest level since September 3, as investors remained unconvinced that the Bank of Japan's recent rate hike signals a faster tightening cycle. Japanese Finance Minister Satsuki Katayama said the principles behind the coordinated Japan-US currency intervention in July remain intact, but sentiment stayed fragile.

“The yen is another currency that may find the going tough in the coming weeks although the ever-present threat of forex intervention should help temper the rise in the dollar/yen,” said Daragh Maher, senior forex strategist at HSBC. He noted that the yen's early September surge has already reversed, making a fresh short squeeze unlikely.

What does this mean for Asian currencies and trade?

The dollar index rose 0.13 per cent to 101.22, its firmest since July 29, sending the euro to a two-month low of $1.1373. Higher oil prices tend to strengthen the dollar as investors sell currencies of energy-importing economies like the euro and yen, whose trade balances are more vulnerable to rising crude costs. For ASEAN economies, a stronger dollar could pressure regional currencies and complicate import bills, though export competitiveness may see a boost. The region's central banks will likely watch the Fed's next moves closely as they balance growth and inflation.

FAQ

Why is the dollar strengthening?

The dollar is strengthening due to expectations of further Federal Reserve rate hikes, driven by strong US economic data and a hawkish stance from Fed Chair Kevin Warsh.

What did the Swiss National Bank decide?

The SNB left its policy rate unchanged, as expected, and reiterated its readiness to intervene in the foreign exchange market to address excessive franc strength.

How did the Norwegian crown react to Norges Bank's decision?

The Norwegian crown rose after Norges Bank raised its policy rate by 25 basis points to 4.50 per cent and hinted at further hikes, reflecting its focus on domestic inflation.

What is the outlook for the yen?

The yen is under pressure, heading for a fifth straight daily fall, as investors doubt a faster BoJ tightening cycle, though intervention threats may temper further weakness.