Dollar hits highest level since October 2025 amid Fed rate hike bets

The dollar today touched its highest levels since October 2025, Brent crude topped $107 per barrel, and the IPSA closed as Latin America's worst-performing stock market: Chile is facing a convergence of external shocks that is forcing markets and policymakers to rethink, in real time, the outlook for inflation, interest rates, and growth.

The exchange rate closed near $964, accumulating a jump of more than $15 in just two sessions, driven by global dollar strength and mounting expectations that the Federal Reserve will resume its hiking cycle. According to analyst Emanoelle Santos of XTB, the market is now pricing in roughly a 70% probability of a Fed hike in October, up from 55% the previous day. Compounding this is geopolitical tension around negotiations between the United States and Iran, which continues to push crude steadily higher: Brent advanced 4.3% on the day. The IPSA, which had held up with relative resilience against Wednesday's international pressure — supported by local optimism over the government's economic reforms — gave way sharply on Thursday and closed just below 11,300 points.

The combination of a strong dollar and rising oil is reactivating inflation concerns with an intensity that already extends beyond the short term. The latest Financial Traders Survey from the Central Bank reveals that while inflation expectations for September fell to 0.5% month-on-month, the 12-month projections jumped from 3.3% to 3.5%, and the 24-month projections rose from 3.0% to 3.1%, both above the central bank's target. It is an unambiguous warning signal: the market no longer believes that inflation convergence is assured. Central Bank President Rosanna Costa dismissed a stagflation scenario, arguing that the factors currently at play are of a different nature, but the Scotiabank analysis — prepared by chief economist Jorge Selaive — was more direct: it suggested that a hawkish stance could quickly become the base case for monetary policy, opening the possibility that the Central Bank moves from a neutral to a restrictive position. Investment banks surveyed by Consensus Forecast, meanwhile, cut their growth projections for Chile this year and raised their inflation forecasts, though for 2027 they kept GDP at 2.9% and CPI at 3%.

Fuel is the most visible transmission channel of this shock. Although Chile is among the OECD countries whose gasoline prices have risen the least proportionally since the start of the war between the United States and Iran — with a 20% increase in 93-octane gasoline, against much larger gains in other bloc members — absolute prices are already historically elevated: 93-octane gasoline is near $1,460 in the Metropolitan Region, and diesel averages $1,338. And pressures could intensify. Statements from President Donald Trump about the possibility of restricting U.S. diesel exports triggered immediate alarm, though his Energy Secretary, Chris Wright, later clarified in an interview with The Wall Street Journal that partial, voluntary restrictions are being studied, not an outright ban. President José Antonio Kast, attending the UN General Assembly in New York, warned that this would be "very bad news for the entire world" and previewed targeted relief measures for the most vulnerable sectors, while the Confederación Nacional de Dueños de Camiones demanded greater transparency and supply guarantees from the government.

Against this backdrop of external pressure and fiscal uncertainty, the local debt market faces an additional, domestically driven disruption. The new AFP investment regime modified the benchmark for domestic sovereign debt, indexing it to the UF and excluding nominal peso-denominated instruments. The consequence, according to the industry, will be a structural decline in demand for local-currency sovereign bonds, precisely as the government seeks to diversify its financing: the State is preparing its first debt issuance denominated in Swiss francs, a market that Chilean private issuers already know well but that the sovereign had bypassed in favor of dollars and euros.

In the corporate sector, forestry companies are driving the largest moves. CMPC completed the sale of a subsidiary as a financing lever to advance its project in Brazil, a transaction well received by the market, though analysts expect the company to continue monetizing forestry assets to strengthen its position. Arauco, for its part, is preparing a hybrid bond of up to UF 10 million to shore up its balance sheet as the Sucuriú project in Brazil enters its final stages, eleven months after placing the largest corporate bond in Chilean history. That two of the country's largest industrial groups are simultaneously turning to innovative debt instruments to finance mega-projects abroad speaks both to their strategic ambition and to the rising cost of global financing.

The picture is completed by signs of institutional fragility in public infrastructure projects. EFE faces a simultaneous governance crisis: the tender for the last section of the Santiago-Melipilla rail line was declared void, reviving the debate over the state-owned company's use of exemptions, while the departure of its general manager further strains the progress of its rail projects. In Iquique, the successive withdrawals of Itaú, Santander, and now Bci from the Free Trade Zone leave Zofri operators without sufficient in-person banking for their cash operations, prompting the users' association to ask the Ministry of Economy to install a BancoEstado branch on site.

Next week will mark several simultaneous inflection points: the presentation of the 2027 Budget — which is already generating tension with regional governors, university rectors, and the defense sector, the latter exempted from cuts with an announcement of historic investment in military hardware — the release of the September CPI, and the evolution of long-dated U.S. Treasury yields, which will continue to dictate the pace of the local dollar and, with it, the temperature of the debate over whether Chile should prepare for a new monetary tightening cycle sooner than expected.