Record Financial Group’s September market commentary examines the factors influencing currency markets, with Federal Reserve policy, renewed tensions around the Strait of Hormuz and diverging central bank decisions shaping exchange rate movements.
The US dollar strengthened during September as the Federal Reserve raised interest rates for the first time since 2023. Stronger employment data and rising energy costs reinforced inflation concerns, supporting the case for tighter monetary policy. The rate increase, combined with higher US Treasury yields, helped the dollar advance against most major currencies.
The Federal Reserve raised its policy rate by 0.25 percentage points to a range of 3.75% to 4.00% on 16 September. Policymakers indicated that inflation remained elevated, while projections pointed to the possibility of another increase before the end of 2026. However, softer core inflation data and comments from New York Federal Reserve President John Williams reduced expectations of an immediate further move towards the end of the month.
Geopolitical tensions also influenced currency markets. Renewed disruption around the Strait of Hormuz, following attacks on shipping and energy infrastructure, pushed Brent crude towards $100 a barrel. The situation deteriorated further after the US president rejected an Iranian proposal to reopen the strait in exchange for sanctions relief. Shipping movements through the key waterway remained well below pre-conflict levels, keeping energy supply risks in focus.
Higher energy prices added to inflationary pressures and prompted several central banks to raise interest rates during September. The Reserve Bank of New Zealand, European Central Bank, Norges Bank and Reserve Bank of Australia all increased rates. However, these decisions did not provide sufficient support for their respective currencies against the US dollar, which benefited from the Federal Reserve’s own tightening and rising Treasury yields.
The Norwegian krone and Australian dollar weakened despite higher oil prices and domestic rate increases. The New Zealand dollar recorded the largest decline among major developed-market currencies, as investors interpreted the Reserve Bank of New Zealand’s guidance as signalling a slower pace of future increases amid weaker economic growth.
Central banks that maintained interest rates also faced pressure. Sweden’s Riksbank kept its policy rate at 1.75%, although it signalled possible increases later in the year. A weakening labour market contributed to further weakness in the Swedish krona, which was the poorest-performing European currency during the month.
The Swiss National Bank left its policy rate unchanged at 0% and reiterated its willingness to intervene in foreign exchange markets. The widening interest rate gap between Switzerland and countries raising rates weighed on the Swiss franc.
In the UK, the Bank of England maintained its rate at 3.75% on 17 September, with the decision split six votes to three. Sterling proved more resilient than the euro, supported by comments on the government’s forthcoming Autumn Budget that helped moderate concerns about rising gilt yields and limited fiscal flexibility. In France, budget uncertainty added to pressure on the euro.
The Japanese yen was the only major developed-market currency to appreciate against the US dollar during September. The Bank of Japan raised its policy rate to 1.25% on 18 September, with a seven-to-two vote. Warnings from Japan’s finance minister, alongside indications that the United States shared Tokyo’s concerns about yen weakness, increased the perceived risk of intervention and discouraged investors from establishing further short positions.
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