US dollar heads for its best month since June on Fed rate bets

The Bloomberg Dollar Spot Index advanced 1.8% in September, reaching its highest level in two months and heading for its best monthly performance since June. Solid US economic data and renewed focus by the Federal Reserve on curbing inflation drove expectations for interest rates and US bond yields higher.

The conflict in Iran kept energy prices elevated and pushed Treasury yields to historic highs, with the 30-year yield touching its highest level since 2002. Financial markets now price in nearly one percentage point of Federal Reserve rate increases over the next 12 months.

Hawkish comments from monetary policymakers reinforced the move following the central bank's first rate increase in three years. Fed Governor Michael Barr reiterated on Tuesday, 29 September 2026, that further rate hikes will likely be necessary, while New York Fed President John Williams indicated an additional increase could be appropriate toward late 2026 to bring inflation back to target. In response, Morgan Stanley dropped its longstanding projection of dollar weakness for the second half of 2026.

Every Group of 10 currency except the Japanese yen weakened against the dollar in September. The yen gained support from the risk of official intervention by Japanese authorities and expectations of additional rate hikes by the Bank of Japan. Option risk reversals showed positioning favoring the dollar at levels closest to their most bullish since June.

Technical indicators signaled potential limits to the rally. A dollar momentum gauge topped 70 on Tuesday, 29 September 2026, pointing to overbought conditions after the Bloomberg relative strength index also signaled an overextended move on 24 September. Noah Buffam, strategist at CIBC Capital Markets, noted that the currency is starting to look stretched, while Kamakshya Trivedi, head of global currency and rate forecasts at Goldman Sachs Group Inc., projected that the dollar will trade in its current range with only one further Fed hike in October.