The dollar posted its biggest one day gain since September on Tuesday as the hot October inflation report pushed Treasury yields higher and the Fed December hike into near certainty. The October consumer price index rose 0.4 percent for the month against 0.3 percent expected, core CPI rose 0.3 percent against 0.2 percent expected, and the currency market reacted at once.
Why it matters
The mechanism is rates. Higher inflation means higher interest rates, and higher rates mean a stronger dollar, as money flows into the currency that pays more to hold it. The 10 year Treasury yield climbed to 5.00 percent, the 2 year rose 20 basis points to 4.77 percent, and the dollar gained against every major currency in the same session. The December hike is now treated as certain, and Goldman Sachs has added a third hike in March 2027, so the dollar strength has a rate path behind it.
The move hit everything priced in dollars. Gold fell about 100 dollars on the CPI print and Waller comments, oil rebounded on Hormuz shipping fears rather than the dollar, and emerging market currencies fell as the stronger dollar made their dollar debts more expensive. The Sensex in India still rallied, helped by lower crude, but most markets outside the United States felt the squeeze.
What happens next
The wider picture is a Fed that is back to hiking. The December hike is now treated as certain, Goldman Sachs has added a third hike in March 2027, and the market has fully priced in a 25 basis point hike with a small chance of 50. The dollar is the market way of saying it believes the Fed will do what it says.
What happens next will be decided at the December meeting and in the November inflation data. If the Fed hikes by 50 basis points, the dollar goes higher still. If it hikes by 25 and signals a pause, the currency may steady. For now, the biggest one day gain since September is the market verdict on a hotter than expected October. The 10 year yield climbed to 5.00 percent, gold fell about 100 dollars, and emerging market currencies fell as the stronger dollar made their dollar debts more expensive.
