The Dollar’s Second Wind: Why Every Major Central Bank Is Now Fighting the Same Fire

The dollar is back at the top of currency markets, and this time it is not getting there on growth optimism. The DXY index, which tracks the greenback against a basket of major currencies, touched 101.10 on Thursday — its highest level in two months, and a sharp climb from late August’s low near 98.55. The move has a clear engine: the Federal Reserve is raising interest rates again, US economic data keeps surprising to the upside, and oil above $100 a barrel has put inflation back at the center of every policy conversation.

The September 15–16 FOMC meeting delivered what markets expected and a little more. The Fed raised its target range a quarter point to 3.75%–4.00% — the first US rate hike since July 2023 — on a unanimous 12–0 vote. Chair Kevin Warsh, in his first full tightening cycle as chair, told reporters the committee had “removed a dose of accommodation,” a phrase he repeated three times, and one traders read as a promise that more could follow. The updated dot plot backed that reading: the median projection puts the funds rate at 4.1% by year-end, and 16 of 18 participants expect at least one more increase in 2026. Markets now put roughly 70% odds on a second straight hike when the FOMC meets again on October 27–28.

Then came the data. September’s flash purchasing managers’ surveys showed US manufacturing jumping to 57 from 53.9 in August and services climbing to 58.7, pushing the composite to 58.4 — numbers that read less like an economy cooling under higher rates and more like one running hot. A poorly received auction of five-year Treasury notes on Wednesday pushed five-year yields above 5% for the first time since 2007. When the world’s safest borrower has to pay 2007-era rates to fund itself, the dollar’s yield advantage becomes hard to argue against.

That is the backdrop. What makes this moment unusual is that the rest of the world’s central banks are, for once, moving in the same direction as the Fed — and their currencies are still losing.

The euro: hiking, but on shakier ground

The European Central Bank raised rates on September 10, lifting its deposit rate a quarter point to 2.50%, with the main refinancing rate at 2.65% and the marginal lending rate at 2.90%. It was the ECB’s second hike of 2026, following one in June, and the first time since 2023 that Frankfurt has tightened twice in a year. President Christine Lagarde was blunt about the reason: the Middle East conflict is generating inflation pressure through energy prices, and inflation is “set to remain well above target for an extended period.”

So why is the euro at a two-month low? EUR/USD closed Wednesday’s New York session at $1.1386, its weakest close since late July, and touched an intraday low of $1.1378 on Thursday. The pair is down nearly 2% so far in September. The answer is the fine print of Lagarde’s message. While she warned that inflation risks are tilted to the upside, she paired it with a warning that growth risks are tilted to the downside. The ECB’s own staff projections see inflation averaging 3.0% this year and 2.5% next, but assume the energy shock fades — an assumption the bank itself calls “highly uncertain.”

Currency traders heard two central banks saying the same thing about inflation but only one backed by a 58.4 PMI. The Fed is hiking into strength; the ECB is hiking into a slowdown. That asymmetry is worth roughly 150 basis points of policy-rate gap at the top of the ranges, and it is the reason the euro keeps sliding even as Frankfurt tightens. For EUR/USD to stabilize, either the Fed has to pause — unlikely before October — or euro-area data has to surprise to the upside. Neither looks imminent.

The yen: a 31-year high in rates, and still no respect

If the euro’s story is about growth, the yen’s is about credibility. The Bank of Japan raised its policy rate a quarter point to 1.25% at its September 17–18 meeting, on a 7–2 vote, taking Japanese rates to their highest level since 1995. Governor Kazuo Ueda pointed to persistent inflation from rising oil prices and companies passing higher wages through to selling prices, and the board kept the door open to further tightening.

The market’s response was a shrug. USD/JPY sits near 159, having actually risen — the yen weakening — in the days after the hike. Two things explain the disconnect. First, 1.25% is still a fraction of the 4.00% top of the US range; the carry trade that borrows yen to buy dollars remains one of the most crowded positions in global markets, with yen net shorts near all-time highs. Second, Tokyo’s own officials keep talking down the currency: Finance Minister Satsuki Katayama said this week that the principles behind July’s coordinated Japan-US intervention “remain alive,” and Japanese authorities conducted rate checks — the classic precursor to intervention — on Friday. When a finance minister has to remind markets she might intervene, it is an admission the rate hike alone did not do the job.

The yen’s problem is that the BoJ is hiking cautiously while the Fed is hiking confidently. Until that changes — or until intervention actually arrives — dollar-yen remains a bet on the US-Japan rate gap, and the gap is widening in the dollar’s favor.

Sterling: one vote away from a hike, and still falling

The Bank of England’s September decision was the week’s most instructive near-miss. The Monetary Policy Committee held Bank Rate at 3.75% on September 17 in a 6–3 vote, with Megan Greene, Catherine Mann and chief economist Huw Pill all voting for an immediate rise to 4.00%. It was the sixth consecutive hold, with rates unchanged since a cut last December — but the language hardened noticeably. The Bank now expects inflation to exceed 4% in early 2027, up from a 3.2% peak in its previous forecast, and Governor Andrew Bailey warned explicitly that a prolonged Middle East conflict could require tighter policy. The committee even slowed the pace of its quantitative tightening program.

Yet GBP/USD fell to around $1.3230–1.3270, a three-month low, before steadying near $1.3360. The arithmetic is simple and unforgiving: with the fed funds ceiling at 4.00% and Bank Rate at 3.75%, the dollar now carries the yield advantage — a reversal from earlier this year, when sterling held the edge and cable traded as high as $1.3817 in January. Markets had priced roughly a one-in-four chance of a BoE hike in September; the hold disappointed, and the pound paid for it.

Sterling’s path from here runs through two dates: the BoE’s next decision on November 5 and the Fed’s on October 27–28. If the Fed hikes again while the Bank waits, the rate gap widens further and cable drifts lower. If the BoE’s hawks win the argument in November — Barclays already expects hikes in November and February — the pound gets its counterweight. For now, the dollar side of the pair is doing the driving.

What to watch next

The calendar does the talking from here. The FOMC meets October 27–28, with markets pricing roughly two-in-three odds of another quarter-point hike; the minutes of the September meeting land October 7 and will be parsed for how many officials share Warsh’s “dose” framing. The ECB follows on October 29, where Lagarde’s meeting-by-meeting stance will be tested against fresh inflation data. The Bank of England decides November 5, and the Bank of Japan’s next meeting will show whether Ueda is willing to move faster than the market currently believes.

Beyond the meeting rooms, three variables matter. The first is oil: Brent near $103 and WTI near $100-plus keep the inflation floor elevated, and any escalation in the Middle East reprices every central bank’s calculus at once. The second is US data — the next jobs report and CPI will decide whether the Fed’s confidence in a hot economy survives contact with the numbers. The third is intervention risk in Tokyo: rate checks have already happened once, and a disorderly slide past recent highs could force Japan’s hand.

The through-line of September is that the inflation fight is not over, and it is no longer America’s alone. Four of the world’s major central banks have now tightened or warned of tightening within a single month — the Fed, the ECB, the Bank of Japan, and a Bank of England one vote from joining them. When everyone is hiking, the currency that wins is the one hiking from the strongest economy. Right now, that is the dollar.

This is market commentary for informational purposes only and is not investment advice. Exchange rates and market data are approximate and delayed; figures cited were current as of 24 September 2026.