The last week of September has historically been the strongest for the dollar over the past decade, and the current rally suggests this year will be no exception.
As Federal Reserve officials continue to urge vigilance regarding inflation, the Bloomberg Dollar Spot Index rose for the fourth consecutive day, climbing 0.4% to reach its highest level since July 31. The dollar strengthened against all G10 currencies, with the Australian dollar and the pound leading the decline.
High fuel prices stemming from the US-Iran conflict, combined with a resilient economy, have driven expectations for an interest rate hike at the next Fed meeting. After Richmond Fed President Tom Barkin stated on Tuesday that it could take time for inflation shocks to subside, money markets began pricing in at least one quarter-point hike by year-end. Markets currently view an October move as more likely than not.
"The Fed narrative is dominating," ING strategist Francesco Pesole wrote in a note. "Hawkish Fed rhetoric is enough to sustain demand for the dollar."
The dollar's best winning streak since July keeps it in line with historical trends.
The 39th week (under the ISO standard) is typically the last full week of September. Over the past decade, it has posted the highest median return of any week of the year, according to Bloomberg data.
With a potential new Fed rate hike, the gap with other major central banks is widening again, bolstering the dollar's appeal, notes Elias Haddad, global head of market strategy at Brown Brothers Harriman in London.
And even if other central banks continue to tighten policy, "US economic outperformance should support the dollar," he said. Option pricing points to further dollar strengthening. So-called risk reversals—a gauge of bullish versus bearish demand—show that traders favor the dollar across all timeframes, with short-term sentiment at its most positive level since July.