Dollar firms to near 18-month high as hot CPI puts October Fed hike back in play

Investing.com — The U.S. dollar climbed on Wednesday and returned to a near 18-month high, as a mostly hotter-than-anticipated U.S. consumer inflation report led to a resurgence in Federal Reserve rate hike expectations.

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At 16:02 ET (20:02 GMT), the U.S. dollar index, which tracks the greenback against a basket of six major peers, rose 0.4% to 102.54, earlier hitting its highest level since April 10, 2025.

U.S. headline CPI rises at its fastest monthly pace since April

Currency market participants were squarely focused on the latest U.S. consumer price index (CPI) report. As per the Bureau of Labor Statistics, headline CPI ticked up 0.6% M/M in September and core CPI rose 0.3% M/M, compared to estimates of 0.6% and 0.2%, respectively, and August readings of 0.4% and 0.3%, respectively. The headline increase was the biggest since April.

On a Y/Y basis, headline CPI climbed 3.7% in September, while core CPI advanced 2.6%. Both figures were a touch higher than anticipated and accelerated from levels in August.

The index for gasoline prices rose 9.1% M/M in September, accounting for over half of the monthly rise in headline CPI. Meanwhile, the index for energy prices soared 20.4% Y/Y last month.

Going into the CPI report, the odds of imminent Fed monetary policy tightening had taken a hit after favorable data on U.S. economic growth, the central bank’s preferred inflation gauge, and the labor market.

However, the CPI has put an October rate hike back into play. According to the CME FedWatch tool, the probability of a quarter-point hike later this month now stood at around 37%, up from nearly 22% before the release of the consumer inflation data.

“If the September PPI report (out tomorrow morning) also surprises to the upside, it could tip the balance toward a hike at the (Fed) meeting. The PPI includes measures of prices for financial services and hospital services that are not captured in the CPI, but are in the Fed’s preferred measure of inflation, the PCE price index,” Bill Adams, chief U.S. economist at Fifth Third Commercial Bank, said.

“If the Fed hikes in October, it would be in part because they are starting to think of the Iran War as a longer-term disruption of global energy supplies. Fed Governor Waller made this point in a speech last week. The Fed can look through temporary energy price shocks, which fade when supply is restored—shocks like Hurricane Isaias, for example,” he noted.

“But the Fed would see a persistent energy shock as a justification for tighter policy since it would cause a sustained reduction in the economy’s productive capacity—a reduction that persists over the time horizon when monetary policy starts to affect the pace of growth,” Adams added.

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Higher rate environments generally tend to strengthen the dollar.

Later on Wednesday, the Fed’s Beige Book showed only two of the 12 Fed districts reporting moderate growth in economic activity. Three districts reported modest growth, four reported slight growth, and three reported no significant change.

Euro turns negative

Turning to other major currencies, the euro gave up earlier gains and was last down 0.4% to $1.1154 after the release of the U.S. CPI report. The single currency has remained under pressure recently due to a fiscal crisis in France, but had rebounded on Tuesday.

That bounce back had continued initially on Wednesday after European Central Bank (ECB) President Christine Lagarde firmly played down speculation that Frankfurt would intervene to prop up France’s ailing sovereign bond market.

Speaking on the sidelines of the IMF and World Bank meetings to Reuters, Lagarde explicitly stated that Parisian lawmakers must address their projected 5.4% GDP budget deficit through domestic fiscal consolidation rather than expecting ECB backstops via emergency bond-buying tools.

While Lagarde’s refusal to act as a lender of last resort underlines ongoing fiscal risk in French paper, her hawkish refusal to expand the ECB’s balance sheet removed immediate fears of monetary dilution, offering technical support to the single currency.

Elsewhere in Europe, the sterling shed 0.4% to $1.3191.

Indian rupee halts rally

Over in Asia, the Indian rupee halted a three-day rally that had seen it strengthen to as much as 95.015 a dollar on Tuesday.

The surge had been sparked by an aggressive currency intervention package unveiled by the Reserve Bank of India, which included opening a dedicated foreign-exchange facility to supply state-run oil marketing companies with dollars directly from reserves.

Ayushman Ojha, Pranav Kashyap, and Jaiveer Shekhawat contributed to this article

Original Article

Dollar firms to near 18-month high as hot CPI puts October Fed hike back in play

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