The dollar strengthened while the euro came under pressure after the European Central Bank raised interest rates again, highlighting the growing complexity facing global currency markets. The policy divergence between the ECB and Federal Reserve is unfolding against a renewed energy shock, with sharply higher oil prices threatening to prolong inflation and complicate the path of interest rates.

ECB Tightens Policy as Energy Inflation Accelerates

The ECB raised all three of its key interest rates by 0.25 percentage point. The deposit facility rate increased to 2.50%, the main refinancing rate rose to 2.65%, and the marginal lending facility rate reached 2.90%. The changes are scheduled to take effect on September 16, 2026.

The decision reflects a deterioration in the inflation outlook following the surge in energy prices and escalating conflict in the Middle East. The ECB now expects inflation to average 3.0% in 2026, 2.5% in 2027 and 2.1% in 2028, remaining above its 2% target throughout the forecast period.

At the same time, the ECB upgraded its growth outlook, projecting economic expansion of 0.9% in 2026, 1.4% in 2027 and 1.5% in 2028. The combination of higher inflation and continued growth gives the central bank greater room to maintain restrictive policy, although the risk of an energy-driven slowdown remains.

Why Did the Euro Fall After the Rate Hike?

The euro initially fell about 0.28% against the dollar to $1.1599 following the ECB announcement. The move illustrates an important feature of currency markets: higher interest rates do not automatically translate into a stronger currency when investors have already anticipated the decision.

The dollar, meanwhile, gained 0.34% to 99.12 on the Dollar Index after three consecutive sessions of declines. US producer-price data was broadly in line with expectations, but the broader inflation picture reinforced expectations that the Federal Reserve could raise interest rates as soon as the following