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Why the dollar rally may just be getting started

The dollar could continue to lap other currencies after surging in the wake of the U.S. Federal Reserve's interest rate hike on Wednesday.

After the Fed's call, the dollar index, which measures the greenback against a basket of currencies, jumped as high as 102.62, its highest since 2003, from under 101 before the decision. At 9:23 a.m. HK/SIN, the dollar index was at 102.43.

The surge wasn't directly related to the Fed's 25 basis point increase in interest rates to a target range of 0.5 to 0.75 percent, only its second rate hike in a decade. That move was well-expected and well-telegraphed to the market, analysts noted.

What changed was the Federal Open Market Committee's (FOMC) smoke signals indicating that they now expect to hike rates three times in 2017, up from a previous forecast for two hikes.

"Most of the market expected them to hike. That was really a no-brainer," John Gorman, head of non-yen rates trading at Nomura, told CNBC's "Squawk Box" on Thursday.

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But he added, "I don't think the market expected them to rock the boat this much, this late in the year, this close to the end of the year. In fact, what we got obviously was the hike everyone was looking for, but a hawkish tone."

Gorman noted that U.S. economic data have become stronger in recent months, and now President-elect Donald Trump appeared likely to introduce "hawkish and growth-oriented" measures.

He expected that Fed chief Janet Yellen was likely calculating that "in addition to that stronger data, we have to price in the probability that Trump's policies are going to be effective and that's what we're seeing right now."

Others also expected Trump's policies would drive the dollar higher.

"The Trump win gives the U.S. dollar a late cycle positive shock, driven by expectations of somewhat expansionary and somewhat inflationary fiscal policy," Steven Englander, global head of G10 foreign-exchange strategy at Citi, said in a note dated Monday, well before the Fed statement.

"Combined with corporate tax reform and earnings repatriation, the U.S. dollar should have a strong 2017 and 2018," he said in the note, which was titled, "USD knocking on NAIRU's door." Nairu stands for non-accelerating inflation rate of unemployment, or the level of joblessness below which inflation will rise as wages will be pushed up when employers are forced to complete for workers.

In a separate post-Fed note, Englander pointed to Yellen's comments, including ones indicating that fiscal stimulus wasn't really needed and that the economy was nearing full employment.

"These comments make you think that maybe they wanted to move the [hiking] path even more, and were deterred by the fear that the market reaction would be even worse," he said.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

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