Dollar heads for sharpest weekly drop as global rate outlook shifts

Saturday 21 March 2026 - 07:20

By: Dakir Madiha

Dollar heads for sharpest weekly drop as global rate outlook shifts

The US dollar is on track for its steepest weekly decline since late January, falling about 1.1 percent against major currencies as other leading central banks signal tighter monetary policy while the Federal Reserve holds back.

The shift reflects a rapid change in global policy expectations following a surge in energy prices linked to the US and Israeli conflict with Iran that began in late February. Before the escalation, investors expected the Fed to cut rates twice in 2026. Those expectations have now disappeared, while markets increasingly price in rate hikes from other major central banks.

The Federal Reserve kept its benchmark rate unchanged at 3.5 percent to 3.75 percent this week in an 11 to 1 vote. Its policy statement noted uncertainty over the economic impact of developments in the Middle East. Updated projections showed a more cautious outlook, with the median policymaker expecting only one rate cut this year and seven of 19 officials anticipating no cuts.

The main market reaction came from Europe. The European Central Bank held its deposit rate at 2 percent but adopted a more hawkish stance on inflation. Policymakers are expected to begin discussing possible rate increases as early as next month, according to sources cited by Reuters. Markets now assign a 53 percent probability of a rate hike at the ECB’s April 30 meeting. The bank also lowered its 2026 euro zone growth forecast to 0.9 percent and raised its core inflation outlook to 2.3 percent.

The Bank of England delivered an even stronger signal, unanimously voting to keep its rate at 3.75 percent, surprising investors who had expected dissent in favor of cuts. Its statement that it stands ready to act if needed triggered a sharp selloff in short-term UK government bonds. Markets quickly priced in around 80 basis points of rate increases by year-end, equivalent to at least three quarter-point hikes.

Currency markets responded broadly. The euro rose about 1.4 percent over the week, while the British pound gained 1.3 percent. The Japanese yen also strengthened after the Bank of Japan held rates at 0.75 percent but indicated openness to further increases. One board member dissented in favor of an immediate hike to 1 percent.

Analysts say the dollar is weakening due to tighter policy expectations abroad and improved sentiment in energy markets. The divergence highlights different central bank responses to rising oil prices. While the ECB and the Bank of England view energy-driven inflation as requiring tighter policy, the Fed has taken a more cautious approach, balancing risks to inflation and economic growth.

With Brent crude up roughly 50 percent since the start of the conflict, markets are now watching whether the Fed will eventually align with its peers or continue to lag, a dynamic that could extend pressure on the dollar.