Why did the US Dollar remain flat despite the Federal Reserve holding rates and two officials voting for a hike?

The US Dollar (USD) has struggled to extend its recent rally following the Federal Reserve’s decision to leave interest rates unchanged, keeping the currency in consolidation as investors turn to key economic releases. Although two dissenters voted for an immediate rate increase and economic activity remained strong, Fed Chair Kevin Warsh’s caution over the timing of further hikes held back the Greenback. Ahead of September’s US Personal Consumption Expenditures (PCE) inflation release and Q3 Gross Domestic Product (GDP) figures, strategists at DBS Group Research and Commerzbank are assessing whether solid growth combined with softer underlying inflation could undermine longer-term rate-hike expectations, or whether policy tightening in December remains firmly on course.

Can the US Dollar rally withstand yield divergence and softer underlying inflation? DBS weighs in

The contrast between a weaker Greenback and elevated Treasury yields suggests that the Federal Reserve’s hawkish pause failed to support further US Dollar gains, according to Philip Wee at DBS Group Research. Chairman Kevin Warsh’s unwillingness to confirm a December rate increase puts the focus squarely on the forthcoming PCE inflation and Q3 GDP releases. In Wee’s assessment, markets could trim their expectations for multiple Fed hikes in 2027 if growth stays resilient while underlying inflation moderates.

"The Fed’s hawkish hold was not enough to sustain the USD’s rally. The divergence between a softer DXY and higher US Treasury yields was particularly noteworthy... Fed Chairman Kevin Warsh’s refusal to affirm a December hike leaves markets reliant on today’s PCE inflation and 3Q26 GDP reports for guidance... September’s headline PCE inflation is expected to increase to 3.6% YoY (0.5% MoM)... Advance estimate for 3Q26 GDP growth is expected to accelerate to an annualised 3.2% QoQ saar... A combination of resilient growth and easing underlying inflation should prompt a reassessment of the multiple 2027 Fed hikes projected by markets."

Why has the USD barely moved despite 85% odds of a December Fed hike? Commerzbank assesses

With markets still assigning an 85% probability to a December rate increase, the US Dollar barely reacted to the Fed’s decision to keep rates unchanged, notes Michael Pfister at Commerzbank. That muted response came despite two dissenting votes in favour of a hike. Robust growth and labour market data continue to underpin the case for further tightening. Pfister nevertheless points to structural changes to FOMC meetings from 2027, which will shift foreign exchange volatility further towards economic releases and away from central bank announcements.

"As expected, yesterday’s Federal Reserve meeting did not result in any change to interest rates. However, two votes were cast in favour of a rate hike, including one from Lisa Cook... For the US dollar, therefore, the whole affair was a non-event: there was virtually no movement, and the market continues to price in an interest rate rise of roughly 85% for the December meeting... The meeting became particularly interesting at the outset when Warsh announced that, whilst they intend to stick to eight meetings a year, from 2027 onwards, one of these will be a strategy meeting without an interest rate decision or statement."

What Could Shape the Dollar’s Next Move?

Little movement in the US Dollar after the Federal Reserve’s rate pause reflects a foreign exchange market balancing near-term expectations of tighter policy against a longer-term reassessment of the economic outlook. According to Commerzbank, an 85% probability of a December hike remains an anchor for near-term Greenback valuations. By contrast, DBS Group Research argues that if Q3 GDP (3.2% QoQ annualised) confirms robust expansion while core inflation eases, investors may have to reduce their expectations for Fed rate increases in 2027, temporarily limiting further US Dollar gains.

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)