Dollar Index Hits 14-week High

The US dollar index steadied around 101.7 on Wednesday after hitting three-week lows in the previous session, finding support as rising oil prices heightened inflation concerns and strengthened safe-haven demand for the greenback. Oil prices resumed their upward trend after a diplomat disputed reports that an agreement to end the US-Iran conflict was imminent, while confirming that negotiations remain ongoing. Meanwhile, the US Federal Reserve is widely expected to keep interest rates unchanged next week, with markets anticipating a potential rate hike in December. Elsewhere, the yen traded within a narrow range as the Bank of Japan is expected to maintain its policy rate next week before raising it in December. The euro also stabilized after weakening earlier in the week following violent protests in France and other European countries, although widespread unrest has since subsided.

The dollar index weakened to 101.5 on Tuesday, its lowest level in about three weeks, amid renewed concerns over AI, falling oil prices on hopes for a diplomatic resolution to the war in Iran, and weaker-than-expected housing data. Housing starts fell 5.2% in September, while pending home sales dropped to a record low, highlighting the continued impact of elevated mortgage rates on housing demand. Meanwhile, the Fed is widely expected to leave interest rates unchanged at its meeting next week, although markets anticipate a 25bps rate hike in December. Elsewhere, the euro rebounded as unrest in France eased overnight, while the yen appreciated, snapping a two-day losing streak after an auction of longer-dated Japanese government bonds attracted record demand.

The US dollar index edged lower to below 102 on Tuesday as investors evaluated the Federal Reserve’s monetary policy outlook ahead of its October 27–28 meeting. Market participants are also awaiting the latest PCE price index report, the Fed’s preferred measure of inflation due next week. Markets currently assign an 83% probability to the central bank holding interest rates steady next week, while pricing in a 94% chance of a rate hike in December. On Friday, Fed Chair Kevin Warsh declined to indicate the likely outcome of this month’s FOMC meeting but noted that stronger-than-expected inflation had not changed his assessment of the US economy. Elsewhere, the euro recovered modestly as European governments sought to contain widespread unrest that turned violent over the weekend. In Japan, the yen weakened despite hawkish remarks from Bank of Japan Governor Kazuo Ueda, who indicated that underlying inflation was nearing the central bank’s 2% target.