Why the US Dollar Is Rising: Fed Rates, Yields, and Key Market Signals

The US dollar has strengthened in September, with the Dollar Index (DXY) trading around 101.1–101.2, close to a two-month high. The dollar has gained around 1.7%–1.8% this month as markets adjust their expectations for US interest rates and Treasury yields.

The move is important because the dollar is rising at the same time that US Treasury yields are climbing. The 10-year Treasury yield recently moved above 5.27%, while the two-year yield approached 5%.

Higher yields can make US assets more attractive to investors, while expectations of higher interest rates can also support demand for the dollar.

What is driving the dollar higher, and what does it mean for major markets?

The Fed and Higher Interest Rates

The Federal Reserve is at the center of the dollar's recent move.

At its September 15–16 meeting, the Fed raised its benchmark interest rate by 25 basis points to 3.75%–4.00%.

The decision was important because it was the first US rate hike in three years.

The Fed also continues to face inflation that is above its 2% long-term target. Its latest projections showed median PCE inflation at 3.7% for 2026, while core PCE inflation was projected at 3.4%.

This means inflation is still an important concern for policymakers.

The market is now also considering the possibility of another rate increase at the Fed's October meeting. By September 29, market pricing was showing roughly a 70% probability of another 25-basis-point hike.

When investors expect US interest rates to remain high, demand for US assets can increase. That can support the dollar.

Why Are US Treasury Yields Important?

Another important part of the story is the rise in US Treasury yields.

The 10-year Treasury yield recently moved above 5.27%, while the two-year yield approached 5%.

Treasury yields show the return investors can receive from US government bonds.

When yields rise, US bonds can become more attractive compared with bonds from countries offering lower returns.

This can increase demand for the US dollar because international investors often need dollars to buy US assets.

The basic relationship can be simplified as:

Higher rate expectations
↓
Higher Treasury yields
↓
US assets become more attractive
↓
Potentially stronger US dollar

This relationship is not guaranteed, but it is an important factor behind the dollar's recent strength.

DXY: The Dollar Is Back Above 100

The Dollar Index, or DXY, measures the value of the US dollar against a basket of major currencies.

DXY was trading around 101.1–101.2 on September 29, close to a two-month high. The index was also on track for a monthly gain of around 1.7%–1.8%.

The move shows that demand for the dollar has strengthened.

However, DXY does not move independently.

It is affected by interest rates, economic data, Federal Reserve expectations and movements in other major currencies.

For this reason, traders often look at DXY together with US Treasury yields and Fed expectations.

If Treasury yields continue to rise and markets continue to expect higher US interest rates, the dollar could remain supported.

If those expectations change, the dollar could also lose momentum.

EUR/USD Under Pressure

The dollar's strength has also affected EUR/USD.

The pair was trading around 1.1376 on September 29, close to a two-month low. EUR/USD was also heading toward a decline of around 2% for September.

EUR/USD Monthly Chart

One of the main reasons is the difference between US and European interest-rate expectations.

If investors expect US rates to stay higher than European rates, US assets can become relatively more attractive.

That can support the dollar and put pressure on EUR/USD.

However, the European Central Bank also plays an important role.

The euro can strengthen if expectations for European interest rates increase or if expectations for US rates decline.

Therefore, EUR/USD is largely influenced by the changing interest-rate difference between the US and Europe.

Why Is Gold Sensitive to the Dollar and Yields?

Gold is another market closely connected to the US dollar and Treasury yields.

Gold does not pay interest.

Because of this, higher interest rates can increase the opportunity cost of holding gold.

When Treasury yields rise, some investors may prefer interest-bearing assets instead of gold.

A stronger dollar can also put pressure on gold because gold is priced in US dollars. When the dollar becomes stronger, gold can become more expensive for buyers using other currencies.

This creates two important relationships:

Higher Treasury yields
→ Can reduce demand for gold

Stronger US dollar
→ Can also pressure gold

However, this does not mean gold will always fall when the dollar rises.

Gold can also respond to inflation, central-bank buying, market risk and geopolitical developments.

The relationship is therefore more complicated than simply saying "USD up, gold down."

Why US Economic Data Still Matter

Even though the Fed has already raised interest rates, economic data remain important because they can influence expectations for future policy.

Two of the most important areas are inflation and employment.

The Personal Consumption Expenditures (PCE) price index is closely followed by the Federal Reserve.

The previous core PCE reading showed inflation at 3.3% year-on-year through July, which remains well above the Fed's 2% target.

Employment is also important.

A Reuters poll expected September payroll growth of around 90K jobs, with unemployment at approximately 4.1%.

Strong economic data could support expectations for additional Fed tightening.

Weaker data could have the opposite effect.

For the dollar, this means economic data can influence the market through interest-rate expectations.

For example:

Strong data
→ Higher rate expectations
→ Higher yields
→ Potentially stronger USD

While:

Weak data
→ Lower rate expectations
→ Lower yields
→ Potentially weaker USD

The actual market reaction can still vary depending on what investors have already priced into the market.

Why the Fed Matters for the Dollar

The Federal Reserve has a major influence on the US dollar because its interest-rate decisions affect the return investors can potentially earn from US assets.

When investors expect the Fed to keep rates high, demand for the dollar can increase.

When expectations shift toward lower rates, the dollar can come under pressure.

The relationship can be simplified as:

Hawkish Fed expectations
→ Higher US rates
→ Higher Treasury yields
→ Potentially stronger USD

Dovish Fed expectations
→ Lower US rates
→ Lower Treasury yields
→ Potentially weaker USD

But the market does not only react to what the Fed does.

It also reacts to what investors expected the Fed to do.

For example, if a rate hike is already fully priced in, the dollar may not rise significantly when the Fed actually raises rates.

This is why expectations are so important in financial markets.

Conclusion

The US dollar has strengthened in September as markets reassess the outlook for US interest rates.

The Fed has raised its benchmark rate to 3.75%–4.00%, while inflation remains above its 2% target. At the same time, markets are considering the possibility of another rate increase in October.

US Treasury yields have also risen, with the 10-year yield moving above 5.27%.

Together, higher yields and expectations for tighter US monetary policy have provided support for the dollar.

The impact can be seen across several markets. DXY has moved toward a two-month high, EUR/USD has come under pressure, while gold remains sensitive to movements in the dollar and Treasury yields.

For traders and investors, the key point is simple: changes in US interest-rate expectations can have a direct impact on the dollar and other major financial markets.

Understanding the relationship between the Fed, Treasury yields and economic data can help explain why the US dollar is strengthening and why these markets can move together.

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