The U.S. dollar soared on Wednesday after the Federal Reserve, under new Chair Kevin Warsh, released a significantly more hawkish interest rate projection, catching markets off guard and sparking a sharp repricing of currency markets. The euro tumbled to multi-year lows, with EUR/USD plunging from 1.0850 to a session low of 1.0580, its weakest since November 2023.
The Fed held its benchmark rate steady at 4.25%-4.50% as expected, but the accompanying dot plot shocked traders. The median projection for end-2025 jumped to 4.75%, up from 4.25% in December’s forecast, and the 2026 median rose to 4.25%. This signals only two quarter-point cuts in 2025 instead of the previously anticipated four, reflecting Warsh’s commitment to maintaining restrictive policy until inflation sustainably returns to the 2% target.
The hawkish pivot led to a broad dollar rally, with the DXY index breaching 105.50 for the first time in three months. The widening yield spread between two-year U.S. Treasuries and German Bunds hit 210 basis points, the highest since October 2024, making dollar-denominated assets more attractive and draining capital from the eurozone. This policy divergence — with the European Central Bank still expected to cut rates — creates a powerful headwind for the euro and tailwind for the dollar.
For risk assets including cryptocurrencies, a higher-for-longer interest rate environment typically pressures valuations, and the dollar strength adds further headwinds for emerging market currencies and speculative investments.
