Newsletter · · Ashutosh Agarwal

The Fed Goes Hawkish and the Dollar Bites Back as the Yen Stalls - G10 FX Weekly - Week of September 17, 2026

G10 FX Weekly for the week of September 17, 2026. Podcast synthesis on the Fed's hawkish quarter-point hike reviving the dollar and stalling the yen breakout, a synchronized global rate-hike wave driven by the oil shock, why the euro and Swiss franc are being used as funders while sterling holds up, and the Bank of Japan meeting that could decide the yen's next leg.

G10 FX Weekly

Week of September 17, 2026: The Fed Goes Hawkish and the Dollar Bites Back as the Yen Stalls

Last Thursday this newsletter was about one thing: the Japanese yen had smashed through the 155 line against the dollar, and the whole world was bracing for a stampede. The "carry trade" (years of borrowing cheap yen to buy higher-yielding things elsewhere) looked like it might finally unravel.

Then, on Wednesday, the referee changed the game. The US Federal Reserve, America's central bank, did something it hadn't done in years: it raised interest rates, and its new chair Kevin Warsh made clear more hikes are coming. The dollar, which had spent weeks unable to catch a bid no matter what good news landed on it, suddenly jumped. And dollar-yen, which had fallen to around 154, bounced right back up toward 156.

So the yen breakout didn't die this week, but it stalled. And a much bigger story snapped into focus behind it: for the first time in memory, almost every major central bank on earth is raising rates at the same time, all chasing the same oil-driven inflation. This issue is about that rare, synchronized turn: who's hiking, who's hesitating, and where it leaves the four currencies we follow with the pivotal Bank of Japan meeting now just days away.

TL;DR

  • The Fed hiked and came out swinging. A unanimous quarter-point rise on Sep 16, and the "dot plot" (the Fed's own chart of where officials expect rates to go) shows at least one more this year. The dollar index rose 0.6%, the euro and Swiss franc each fell about 0.5%, and the Australian dollar dropped from 71.30 to 70.84 US cents (NAB Morning Call, Sep 16).
  • This is now a global rate-hike wave, not a US one. J.P. Morgan's Joseph Lupton says eight of the nine developed economies he tracks will be hiking by year-end, "a generalized move towards DM hiking," and that on a standard rule of thumb, rich-world interest rates are still "roughly 100 basis points too low" (Global Data Pod, Sep 11).
  • The yen's run paused but the case for it hasn't broken. State Street's Michael Metcalfe puts a 70% chance the top in dollar-yen is already in, with a target back toward 120 (Street Signals, Sep 10). J.P. Morgan's Junya Tanase is tactically bullish the yen too, but warns it could drift back to 155–165 if the Bank of Japan disappoints (At Any Rate, Sep 14).
  • Government bonds are screaming. The US 10-year yield hit 5.04%, its highest since 2007; German 10-year yields touched 3.5% (last seen in 2011); and Japan's 10-year hit 3.04%, a level unseen since 1996. The gap between French and German borrowing costs blew out to 98 basis points, wider than at any point in the 2010–12 euro debt crisis (Saxo Market Call, Sep 15).
  • The euro is being treated as a currency to borrow, not own. J.P. Morgan's FX desk calls it a low-yielder at "the lower end of the spectrum," vulnerable to expensive oil and to German and French politics (At Any Rate, Sep 11).
  • Sterling is quietly one of the sturdier majors. The Bank of England is expected to hold today (Thursday) at 3.75% even as UK inflation ticks up to 3.1%, but because the pound pays a relatively high yield it is "more insulated" than other currencies in a rising-rate world (At Any Rate, Sep 11).
  • The Swiss franc is the odd one out, the lowest-yielding major of all, and J.P. Morgan stays bearish on it (At Any Rate, Sep 11).
  • Oil is the engine under all of it. Brent crude broke $100, pushed toward $110, and only eased back to about $105 after the Fed hike. RBC's Helima Croft now runs two scenarios: about $96 a barrel if the conflict stays contained, $122 if it widens (CNBC Fast Money, Sep 17).

What's new

1. The Fed finally hiked, and the dollar remembered how to rally

For weeks the dollar had been the great disappointment. Strong US jobs, hot inflation, oil surging: all the ingredients that normally push a currency up, and it just sat there. On At Any Rate (Sep 11), J.P. Morgan's Meera Chandran captured the frustration of the dollar bulls: "the dollar just won't strengthen… if so much is priced already for the Fed and rates markets, and if all central banks are hiking and growth is good everywhere, does the dollar really deserve to strengthen?"

The Fed's Sep 16 meeting answered the question. On NAB Morning Call (Sep 16), NAB's Ray Attrill walked through it: a unanimous quarter-point hike, and a chair who "certainly… come across as particularly hawkish." The market quickly moved to price 31 basis points of further hikes across the October and December meetings. In plain terms, one more rise is now close to a done deal, with a second on the table. The dollar index rose 0.6%, and the Australian dollar fell "from around 71.30 to… about 70.84." The euro and Swiss franc each slipped about half a percent.

The telling detail was a single line Attrill flagged from the press conference: Warsh said the Fed had merely "removed some accommodation" and that it would be "hard-pressed to say that financial conditions were restrictive." Translation: the Fed thinks its own policy is still helping the economy rather than slowing it, which means, in Attrill's words, "there's more work to be done to take policy to neutral or… into modestly restrictive territory." That is a central bank telling you it is not close to finished.

Why it matters: last week's whole yen story rested on the idea that the US was the one big economy hesitating while everyone else tightened, which is what kept the dollar soft and the yen strong. The Fed just removed that prop. As RiskReversal's traders noted watching it live on CNBC Fast Money (Sep 17), dollar-yen climbed from about 155.25 to 156.5 in the hours after the decision, and one trader argued the dollar will "probably test those highs from June based upon the central bank differentials."

2. The real headline: everyone is hiking at once

Step back from any single meeting and something unusual is happening. On Global Data Pod (Sep 11), J.P. Morgan's Joseph Lupton laid it out plainly:

I think it's the start of a generalized move towards DM hiking. We've got forecasted between now and year end eight of the nine advanced economies that we track hiking. Canada is the only… lonesome dove among the group.

His point is that this is not a fine-tuning exercise. Using a standard "Taylor rule" (a back-of-envelope formula for where rates should be given inflation and growth), Lupton figures developed-world interest rates are sitting "roughly 100 basis points too low." He is not saying central banks will hike a full percentage point tomorrow, but that "we should be biased towards thinking still more rather than less." His colleague Bruce Kasman framed the euro area as needing rates around 3%, the US around 5%, and, strikingly, Japan closer to 6% if you took the formula literally.

The common cause is the oil shock (more on that below), which is pushing up inflation everywhere at once and stripping central bankers of their old confidence that prices would drift back to target on their own. Dominic Konstam of Mizuho, on Bloomberg Surveillance (Sep 15), tied the global bond sell-off to the same root: "people don't like government debt… term premiums are high everywhere. And there's this pressure… on central banks to kind of tighten policy and… stabilize those yields since the government sectors aren't going to do it." In his ranking, "the ECB has been a bit more forceful. The UK is finally catching up… The BOJ has been a bit behind as well, but they're going to be tightening… quite aggressively in the end."

Why it matters: when every central bank hikes together, the currency winners are decided by relative yield and by who has the cleaner fiscal house, not by the direction of rates, which is up everywhere. That reframes all four of our threads.

3. Europe hikes into a political storm, and the euro can't get lift

The European Central Bank raised rates a quarter-point in early September, a move its president Christine Lagarde reportedly called "a no-brainer," with no real dispute on the governing council (Unhedged, Sep 10). Markets have run far ahead of that, pricing another 75–80 basis points of hikes over the next year. On At Any Rate (Sep 11), J.P. Morgan's Francis Diamond and Aditi Chaudhia think that's stretched (their economists see just one more hike in December, maybe another in March) but admit that "given the limited visibility over energy prices, it's really hard to be actively pushing back."

Here's the puzzle for anyone hoping a hawkish ECB would lift the euro: it hasn't. On the same At Any Rate Global FX episode (Sep 11), Chandran was blunt that the euro "is still fairly… lower end of the spectrum" and that she prefers "to use it as a funder," that is, a currency to borrow and sell, not to own. Two reasons: Europe imports its energy, so an oil spike hurts it directly; and its politics are getting noisier, with the far-right AfD taking 44% in a German state vote and two more elections due Sep 20.

That political anxiety is showing up in bond markets. On Saxo Market Call (Sep 15), Saxo's John Hardy flagged that the gap between French and German 10-year borrowing costs "blew out to as much as 98 basis points… a full 10 basis points above the prior high post the Eurozone sovereign debt crisis of 2010 to 2012." Meanwhile German 30-year yields actually fell on the day even as everything else sold off, a sign investors are treating Germany as the safe corner of a shaky European house.

No one put the euro-skeptic case more vividly than Vincent Deluard on Maggie Lake Talking Markets (Sep 14), who argued the next real debt crisis is a European one, not a Japanese one: "Who has a problem with fiscal dominance? Is it Japan or is it Europe? In which country is R greater than G?" He sees a French-German fault line as far more dangerous than the Greek crisis a decade ago: "the periphery" back then was "an ulcer… on your toe," he said, but a France-Germany rift is "between France and Germany… much more lethal."

4. The yen: paused, not finished, and next week is the test

The yen's big week was last week. This week it caught its breath as the dollar rebounded. But the people who called the move are, if anything, more convinced.

On Street Signals (Sep 10), State Street's Michael Metcalfe (one of the sharpest voices on Japan) put a number on it:

So I'm going to say there's a 70% chance we've seen it [the top in dollar-yen], and that's just based on looking at past turning points… there's been 13 of them in the past 50 years, and 9 of them have occurred around intervention.

His reasoning is that this time the intervention (the coordinated yen-buying by Tokyo and Washington in July) is being backed up by actual Bank of Japan rate hikes, which the earlier failed interventions never were. He thinks the yen is more than 40% too cheap and could travel back toward 120 over time, though he'd "not want to be greedy" near-term. One nuance worth noting: if he had to pick a currency to sell in order to buy the yen, it wouldn't be the dollar; it'd be the Swiss franc, which sits "at the opposite end of the valuation spectrum."

The more cautious read comes from J.P. Morgan's Junya Tanase on the At Any Rate BOJ Preview (Sep 14). He explained why the yen suddenly started responding to rate-hike bets: after July's intervention, the market stopped fearing that Japan's central bank was hopelessly "behind the curve," and "rising rate hike expectations… begun to translate into yen strength" instead of weakness. He's tactically bullish. But he flagged the trap on the other side: "if BOJ fails to meet market expectation, behind the curve concern could rise again… resulting in yen depreciation." His medium-term forecast actually has the yen drifting back to 155–165. His colleague Ayako Fujita expects the Bank of Japan to raise rates a notch to 1.25% next week; the danger is that traders have priced an aggressive path (a hike roughly every three months) that the bank may not want to confirm.

That is the pivotal event on the calendar. As one trader on CNBC Fast Money (Sep 17) put it after the dollar's post-Fed pop knocked the yen back, "the BOJ has to go 50," meaning anything less than a forceful hike next week risks handing the dollar the upper hand again.

5. The oil shock that won't quit

None of the above happens without oil, which is why nearly every episode this week circled back to it. On Columbia Energy Exchange (Sep 15), the Center on Global Energy Policy's Daniel Sternhoff explained why prices are only now biting, six months into the Iran conflict: the world entered the crisis with cushions (emergency reserve releases, oil stored on tankers, China slashing its imports), and "now those buffers are essentially gone." He estimates a global shortfall "around 5 million barrels per day," with the sharpest pain in diesel, where a lack of spare refining capacity has pushed US prices above $6 a gallon for the first time in history and blown out "crack spreads" (the premium of fuel over crude) to extremes.

On CNBC Fast Money (Sep 17), RBC's Helima Croft, 200 days into the war, has given up on a single forecast and moved to scenarios: about $96 a barrel for Brent if the conflict stays contained, but $122 if it widens, with the Red Sea and the Bab el-Mandeb chokepoint the things she's watching. The reason we haven't already hit $150, she said, is that "China dramatically slashed imports," but "China's imports have been rising" again. Her blunt summary: "there is no near-term off-ramp on the horizon."

Why it matters: every rate hike described above is, at root, a reaction to this. As long as oil keeps climbing, central banks stay hawkish, bonds keep selling off, and the currency of whichever economy is hurt least by expensive energy wins.

The debate

Fight 1: Is the yen's rally over, or just resting?

The bullish-yen camp is loud and specific. Metcalfe's 70%-chance-the-top-is-in and Tanase's tactical long both rest on the same idea: this time the Bank of Japan will actually deliver, closing the yield gap that made betting on the yen so painful for years. Deluard goes further, calling 155 "still pretty cheap" and arguing Japan's finances (a primary surplus, tax revenue outrunning GDP) are far healthier than Europe's.

The other side isn't really a bearish-yen argument; it's a the-dollar-just-changed-the-math argument. With the Fed now hiking hawkishly, the dollar has a fresh tailwind, and dollar-yen popped straight back toward 156 after the decision. Tanase himself concedes the yen could slide back to 155–165 if next week's Bank of Japan meeting disappoints the aggressive expectations now baked in. So the honest picture: a strong structural case for a stronger yen, sitting on top of a near-term event (the BoJ meeting) that could go either way, and a Fed that has taken away the yen bulls' easiest tailwind.

Fight 2: Which currencies actually win when everyone hikes?

J.P. Morgan's FX desk gave the cleanest framework of the week on At Any Rate Global FX (Sep 11). When every central bank is tightening, the winners are the higher-yielding currencies that also have decent public finances and commodity exports; they named the Norwegian krone, the Australian dollar, and, notably, sterling. The losers are the low-yielders used as funding currencies: the euro, the Swiss franc, and the yen. The Swiss franc, strategist Octavia noted, "is the lowest yielder of them all," pressured "both by yields and… better European growth." It's a neat, if uncomfortable, reminder that a hawkish global backdrop is not automatically dollar-bullish or safe-haven-bullish; it rewards carry.

Trades in play

Drawn from what the desks actually said this week, ranked by usefulness for a book:

  • The dollar has its mojo back, for now. J.P. Morgan stayed "constructive on the dollar" into the Fed and was vindicated; RiskReversal's traders expect it to "test those highs from June." The cleanest expression is long dollar against the low-yielding funders (the euro and Swiss franc) rather than against the yen, where next week's Bank of Japan meeting is a wildcard.
  • Long yen is still the marquee structural trade, but respect the event risk. Metcalfe targets a move back toward 120; Tanase is tactically long. But with the dollar-yen back near 156 and the BoJ meeting days away, this is a trade to size for a binary catalyst, not a one-way grind.
  • Short euro against the yen is Deluard's highest-conviction idea: Japan "took the bit of medicine," while Japanese savers repatriating money "really have to take it from Europe," building pressure on euro/yen.
  • Own the high-yielders, borrow the low-yielders. The desks favor sterling, the Norwegian krone and the Australian dollar (with the RBA seen hiking toward 4.6%) as the currencies most insulated from a Fed hiking cycle, funded by the euro, franc or yen.
  • Mexico as a carry story. On Full Signal (Sep 10), strategist Eric Wallerstein pitched unhedged Mexican assets: "six and a half percent or ish is pretty decent carry," plus a peso lifted by factories relocating from Canada to Mexico under a re-worked North American trade deal. J.P. Morgan's emerging-market desk agrees the peso is resilient (low positioning, strong balance of payments), and flags the Turkish lira, Colombian peso and Brazilian real as the highest-carry cushions, while warning the Israeli shekel and Chilean peso are the most exposed if the Fed keeps surprising hawkish.

Read-throughs

  • Euro/yen and euro/franc. Euro/yen is the cleanest way to play both a stronger yen and a weaker euro at once, Deluard's top trade. On the franc: it slipped about 0.5% on the Fed hike and remains the market's least-loved major on pure yield grounds.
  • Bonds everywhere are selling off together. The US 10-year at 5.04% (highest since 2007), German bunds at 3.5% (a 2011 high), and Japanese 10-years at 3.04% (unseen since 1996) are all telling the same story: investors are demanding more to lend to governments that won't tighten their belts. The France-Germany spread at 98bp (beyond its euro-crisis peak) is the one to watch for genuine European stress.
  • The consumer is the pressure valve. Mizuho's Konstam warned the US savings rate has fallen below 3% and "can't really cut… anymore," so higher rates will bite demand quickly. Restaurant and housing stocks are already flashing it: McDonald's hit a two-year low this week (CNBC Fast Money, Sep 17). A cracking consumer is the thing that eventually forces central banks to stop.
  • Sterling's quiet resilience. The Bank of England is expected to hold at 3.75% today with UK inflation at 3.1%, but the pound's relatively high yield makes it a rare oil-importer that the desks still want to own. Watch the vote split: a shift from 6-3 to 5-4 in favour of holding would signal a November hike is coming.

What changed

Two things flipped this week. First, the Fed stopped being the world's lone hesitant central bank and joined the hiking crowd with a hawkish quarter-point rise, and the dollar, dead for weeks, sprang back to life, dragging dollar-yen up off its lows and pausing the yen breakout that dominated last week. Second, the framing widened: this is no longer a US inflation story or even a yen story, but a genuinely global, synchronized rate-hike wave (eight of nine major economies tightening at once), all driven by an oil shock with "no near-term off-ramp."

The through-line from Monday is intact and sharper: expensive oil is turning the whole developed world hawkish together, bonds are selling off in lockstep, and the currencies that win are the higher-yielders with clean balance sheets, not the funders. The single event that could rewrite all of it lands next week, when the Bank of Japan decides whether to confirm the aggressive path markets have priced, or hand the revived dollar the upper hand.