Dollar holds at $100.85 as FOMC minutes reveal hawkish divergence

The dollar held firm above $100.85 after the Federal Reserve's June meeting minutes confirmed a hawkish tilt, reinforcing the policy divergence that has underpinned the greenback's recent resilience.

The Federal Reserve's June meeting minutes released Wednesday reinforced a hawkish policy stance, with officials signaling readiness to raise rates further, pushing the dollar index to $100.85 and widening the rate differential against major peers. The median dot plot from the June 16-17 meeting indicated one additional quarter-point hike this year, while Chair Kevin Warsh stressed the central bank's commitment to returning inflation to the 2 percent target.

"The minutes cement the hawkish message from the June meeting, where the dot plot signaled a potential hike and Chair Warsh reaffirmed the inflation mandate," said Francesco Pesole, FX strategist at ING. "We expect a cementing of the hawkish message to firm up dollar momentum, although markets may be reluctant to reprice rate expectations aggressively higher after the soft jobs report."

EUR/USD defended the $1.1440 support level while GBP/USD tested resistance at $1.3418, as currency markets priced in the divergence between a Fed leaning toward tightening and central banks in Europe and Asia maintaining accommodative stances. Markets now price 35 basis points of additional tightening by December, according to OIS data. The dollar's safe-haven appeal also received a boost from renewed US-Iran tensions, with oil prices rising after the Treasury revoked waivers allowing Tehran to sell crude.

The hawkish minutes raise the stakes for the Fed's July 29-30 meeting, where another hold with hawkish language could push DXY toward the 101.50-102.00 range, while a dovish surprise would risk a dollar sell-off that lifts EUR/USD above $1.1440 and GBP/USD past $1.3418. The last time the Fed used similarly hawkish language in its minutes was in April 2025, which preceded a 2.3 percent rally in the dollar index over the following six weeks.

Rate Differentials Drive the Trade

The policy divergence story extends beyond the Fed. The Reserve Bank of New Zealand hiked rates by 25 basis points to 2.50 percent on Wednesday, with the statement signaling further tightening "appears likely at upcoming meetings." The RBNZ's hawkish stance pushed NZD/USD higher, though ING expects the pair to settle at 0.59 by year-end as the dovish risks re-emerge later in 2026.

In Europe, the European Central Bank faces a different challenge. French political uncertainty — following Marine Le Pen's announcement she will run in the 2027 presidential election — has kept OAT-Bund spreads elevated, though ING analysts said they are not embedding any political premium in their euro forecasts for now. EUR/SEK may linger above 11.00 as Sweden's June inflation came in at 1.3 percent on the CPIF measure, giving the Riksbank no reason to signal hikes.

What Comes Next for the Dollar

The dollar's trajectory hinges on whether the Fed's hawkish rhetoric translates into action. OIS markets assign a 35 percent probability to a hike at the July meeting, with the remainder of tightening priced across the second half of 2026. A sustained break above $101.50 in DXY would open the path toward $102.00, a level not seen since April. Conversely, any softening in Fed communication or deterioration in US economic data could trigger a sharp reversal, with EUR/USD reclaiming $1.1500 and GBP/USD breaking above $1.3450.

This article is for informational purposes only and does not constitute investment advice.