Despite strong expectations for further Federal Reserve rate hikes, Bank of America forecasts the US dollar will remain rangebound through the end of the year as mixed policy signals and global repricing undermine its momentum
Even as markets price in more Federal Reserve rate hikes, the US dollar has struggled to gain ground. Bank of America now expects the dollar to stay in a narrow range through the end of the year, pushing back against the idea that tighter US policy will automatically lift the currency.
Dollar sentiment has faded since July, when Chair Warsh's Federal Open Market Committee press conference left investors uncertain about the Fed's approach to persistent inflation. The absence of a clear plan, followed by mixed messages from policymakers, has made it hard for the market to believe the Fed can outpace other major central banks. After the August inflation data, market-implied odds of a rate hike at the September 15-16 meeting jumped from about 70% to nearly 87%, with the federal funds rate now in the 3.50%-3.75% range, according to Reuters pricing.
Confusing signals and market repricing
Recent months have brought a mix of data and policy comments that point in different directions. The August jobs report was stronger than expected, but Fed officials Williams and Waller sounded cautious about further tightening. Waller said he would support holding rates steady if inflation keeps improving, but would consider a hike if inflation stays high. Williams called the latest inflation numbers "encouraging" but left the door open to more increases if needed. At the same time, the Treasury's buyback program, aimed at lowering US yields, has added another complication, making the dollar's reaction to economic news less predictable.
Even with a jump in oil, gas, and refined energy prices-factors that often help the dollar-the currency has not rallied. Instead, global shifts in central bank policies and yield curves have kept the dollar subdued against most major currencies. Bank of America's report "G10 FX back-to-school: dollar unloaded" (September 8, 2026) notes that the market is now pricing in more than three additional Fed rate hikes, raising the bar for any further dollar gains. Still, a Reuters poll found that about 70% of economists expect the Fed to keep rates unchanged at the September meeting, even as more now see a hike as possible compared to August.
Data snapshot and policy context
As of early September 2026, market-implied odds suggest an 85% chance of a Fed rate hike at the next FOMC meeting, a sharp rise after the latest CPI release. Yet the US dollar index remains below its mid-year highs, showing that markets are skeptical further tightening will lead to lasting currency gains. This is a shift from previous cycles, when rising US rates usually drew in capital and boosted the dollar. Reuters also reported that, despite changing Fed expectations, the broad dollar index has not shown sustained gains, with traders now focused on upcoming inflation data as the key driver for the currency's direction.
The US 10-year Treasury yield has hovered near multi-year highs, as reported earlier, but this has not translated into a stronger dollar. Instead, investors seem to be weighing the Fed's credibility on inflation against a backdrop of shifting global monetary policy and ongoing fiscal uncertainty. The Federal Reserve's next statement remains a central focus for global markets and is expected to clarify the path forward.
Winners, losers, and the yen exception
Bank of America singles out the Japanese yen as a possible exception to the dollar's sideways trend, given the Bank of Japan's ongoing ultra-loose policy. Against other G10 currencies, the dollar faces more competition as central banks in Europe, Canada, and elsewhere adjust their own policies. For businesses and travelers, this means exchange rates involving the US dollar are likely to stay stable, with few chances for sudden moves or arbitrage-unless a major policy surprise occurs. The Bank of Japan's stance, along with evolving guidance from the European Central Bank, will be closely watched by currency markets in the months ahead.
While the dollar's lack of momentum may disappoint those hoping for a classic rate-driven rally, it also lowers the risk of disruptive currency swings for importers, exporters, and international investors. The muted reaction to both economic data and policy signals suggests that markets want more than just incremental rate hikes-they are looking for clarity, consistency, and a credible long-term plan from the Federal Reserve. This theme is echoed in recent commentary from the Fed and other major central banks, including the Bank of England and the ECB.
Bank of America's call for a rangebound dollar challenges the idea that US monetary tightening alone can drive the currency higher. With the Fed's credibility under scrutiny and global central banks adjusting their own stances, the dollar's direction now depends on more than just headline rate decisions. Until the Fed can lay out a convincing strategy for restoring price stability, the dollar is likely to remain stuck-neither breaking out nor collapsing, but holding steady as global monetary policy continues to shift.
Central bank policy rates are a key driver of currency values, but their impact depends on both the level and the perceived credibility of the institution setting them. When markets trust a central bank to act decisively on inflation, its currency often strengthens. But if policy signals are mixed or the institution's resolve is doubted, even aggressive rate hikes may not deliver the expected currency gains. This is especially true during periods of global monetary realignment, when investors compare not just absolute rates but also the direction and reliability of policy across major economies.
