The U.S. dollar is entering the Federal Reserve’s biggest policy decision in years with a curious mix of strength and uncertainty.

The greenback has remained near multi-week highs as traders largely price in a quarter-point interest-rate increase from the Federal Reserve, which would take the benchmark federal funds target range to 3.75%-4.00%. But with the rate increase already heavily anticipated, currency traders are turning their attention away from the decision itself and toward what Fed Chair Kevin Warsh says about the months ahead.

That distinction is crucial.

The dollar does not necessarily rise simply because the Fed hikes.

It rises when the market believes U.S. interest rates will remain comparatively high for longer than previously expected.

And that possibility is now becoming a central theme across currency, bond and equity markets.

The backdrop is unusually complicated.

Oil prices remain above $100 a barrel amid continuing Middle East supply disruptions. The 10-year Treasury yield recently crossed 5%, its highest level since 2007. Inflation remains above the Fed's 2% target. And investors are debating whether Wednesday's expected rate increase represents the beginning of a broader tightening cycle or merely a one-time response to renewed price pressure.

For much of the year, investors were focused on the possibility of lower U.S. interest rates.

That outlook has changed rapidly.

Markets are now pricing a roughly 90% or higher probability of a 25-basis-point increase. Some economists and major banks expect further tightening later in the year, while others believe the Fed could stop after this week's move.

That uncertainty is actually helping explain the dollar's current resilience.

Foreign investors compare the return available on U.S. assets with returns available elsewhere.

If Treasury yields are rising while the Fed appears increasingly willing to keep rates elevated, dollar-denominated assets become more attractive.

That can encourage capital to flow toward U.S. bonds and other dollar assets.

The result is support for the currency.

But there is an important caveat.

If Warsh raises rates and then indicates that the Fed does not expect additional hikes, the dollar could weaken despite the increase.

Commonwealth Bank strategist Carol Kong said the dollar could receive only a modest boost from an expected hike because much of the move is already priced into markets. She also noted that if Warsh plays down the possibility of further increases, the dollar could ease, while an unexpected decision not to hike could produce a much larger decline.

That is why Wednesday's communication matters so much.

The dollar's strength cannot be separated from the oil market.

Crude prices surged above $100 after disruptions involving Saudi infrastructure and major shipping routes. Brent recently traded around $107-$108 a barrel even after retreating from its latest highs.

That creates a difficult inflation problem for central banks.

Higher oil prices increase transportation and energy costs and can eventually spread into broader goods and services prices.

For the Federal Reserve, that creates less room to ease policy.

For the dollar, it can produce the opposite effect.

If higher energy prices force the Fed to stay restrictive, U.S. interest-rate expectations may remain higher than those of other major economies.

That widens the relative appeal of dollar assets.

The dollar's performance against the Japanese yen is particularly interesting.

The yen has recently strengthened as investors increasingly expect the Bank of Japan to raise rates, potentially as soon as Friday. Markets have reportedly priced a significant probability of a BOJ hike and additional tightening into early 2027.

That gives the currency market another major policy story to watch.

The dollar's rise depends partly on the U.S. rate advantage.

But if the Bank of Japan becomes more aggressive, some of that advantage can narrow.

Japan is also home to enormous pools of institutional capital.

If Japanese yields rise enough to make domestic assets more attractive, investors may gradually repatriate some overseas funds.

That would alter global capital flows and potentially reduce demand for U.S. Treasury securities.

The dollar's recent strength has been particularly visible against major European currencies.

The euro was recently around $1.155, while sterling traded near $1.348, according to Reuters.

Europe is dealing with its own inflation and growth problems.

The European Central Bank and Bank of England have to balance price stability against economic weakness.

If U.S. rates rise while European central banks remain more cautious, the relative interest-rate advantage moves toward the dollar.

Currencies are, in many ways, a contest of relative expectations.

It is not enough to ask whether U.S. interest rates are high.

The more important question is whether they are high compared with rates elsewhere.

Perhaps the most important development is happening in government bonds.

The U.S. 10-year Treasury yield has pushed above 5% and recently hovered around that threshold.

That level matters because Treasury yields influence almost every other financial market.

They affect mortgage rates.

Corporate borrowing costs.

Equity valuations.

Emerging-market debt.

And foreign exchange.

When U.S. Treasuries offer higher yields, international investors have a stronger reason to hold dollars.

But there is another side to the story.

If yields rise too rapidly, investors may begin worrying about the sustainability of U.S. debt and the broader financial consequences of expensive government borrowing.

That is a more complicated dollar story.

The currency can benefit from higher yields in the short term while the economy eventually suffers from the same increase in borrowing costs.

The Fed could deliver exactly what markets expect.

A 25-basis-point hike.

Then the focus shifts immediately to Warsh.

Suppose he emphasizes that inflation remains too high and that further policy tightening may be required.

The dollar could gain.

Treasury yields could rise.

Risk assets could face additional pressure.

Now imagine the opposite.

Warsh raises rates but says policymakers believe recent inflation pressures are likely to moderate and that the central bank can pause.

The dollar could weaken.

Bond yields might fall.

Stocks could receive some relief.

The policy decision would be identical.

The market reaction would be completely different.

A stronger U.S. currency can create substantial pressure on emerging economies.

Many governments and companies in developing countries borrow in dollars.

When the dollar strengthens, the local-currency cost of servicing those obligations increases.

Commodity imports can also become more expensive.

India's rupee, for example, recently approached a six-week low as strong dollar demand collided with oil prices above $100. The Reserve Bank of India has been intervening to limit excessive depreciation.

That illustrates how a U.S. monetary-policy decision can quickly become a global event.

The Fed raises rates in Washington.

Currencies move in Asia.

Bond yields change in Europe.

Commodity prices react.

And emerging-market central banks are forced to respond.

Crypto markets are also highly sensitive to dollar liquidity.

A stronger dollar and higher Treasury yields generally create a tougher environment for assets whose valuations depend heavily on abundant liquidity and investor appetite for risk.

Bitcoin is currently dealing with another headwind after the U.S. Senate failed to advance the CLARITY Act, adding regulatory uncertainty to an already challenging macro environment.

That leaves Bitcoin exposed to two powerful forces.

The crypto market wants clearer regulation.

The macro market is moving toward tighter financial conditions.

The dollar sits at the center of both.

The dollar's latest move could fade if the Fed signals that this is a one-off hike.

But if inflation remains stubborn, oil prices stay elevated and another rate increase becomes increasingly likely, the currency's gains could become more durable.

That would have significant consequences.

A stronger dollar would tighten financial conditions internationally.

A 5% Treasury yield would offer investors a powerful alternative to equities.

Higher funding costs would challenge corporate borrowers.

And emerging markets would face greater pressure.

The dollar therefore is not merely reacting to the Fed.

It is becoming one of the clearest signals of how the world is repricing the cost of money.

Wednesday's decision could provide the first answer.

But the more important signal will come from the words that follow it.

Because the dollar may already know the Fed is hiking.

What it does not yet know is whether Kevin Warsh intends to stop there.