Will the Dollar Rise on a Fed Hike?

The Fed may be getting ready to hike rates again. So, does that mean the dollar is about to take off?

Not necessarily.

A rate hike is normally good news for the dollar. Higher U.S. interest rates can make dollar assets more attractive, encouraging investors to move money into the U.S. and supporting demand for the greenback.

But this time, the story is not quite that simple.

Markets have already been expecting a September hike, which means much of the move may already be priced into the dollar. When the Fed finally delivers, traders may care less about the 25-basis-point hike itself and much more about what comes next.

If the Fed signals that inflation is still too sticky and another hike could follow, the dollar could find fresh support.

But if policymakers make it clear that this is a one-and-done move, the reaction could be very different. The dollar may struggle to extend its gains, or even give back some of its recent strength.

There is another factor to watch: the U.S. economy.

If higher rates start weighing on jobs and growth, the Fed may have less room to keep tightening. In that case, a rate hike could actually strengthen the dollar only briefly.

So the real question for traders is not simply “Will the Fed hike?”

It is “Will the Fed keep hiking?”

That answer could determine whether the dollar gets another leg higher — or finds itself running out of fuel.