Dollar Rises Further as War With Iran Escalates

The dollar index extended its gains to 102.3 on Tuesday, amid growing expectations that the Fed could pursue a more aggressive pace of interest rate hikes in the coming months, following a hotter-than-expected inflation report and increasingly hawkish comments from Fed officials. Consumer prices rose 0.4% in October, exceeding market expectations of a 0.3% increase, while core CPI advanced 0.3% for the third consecutive month, also above forecasts of 0.2%. Adding to the hawkish outlook, Fed Governor Waller warned that a 50bps rate hike in December may be necessary. Meanwhile, Dallas Fed President Logan supported at least two additional 25bps increases, suggesting that further tightening may be required at a faster pace than policymakers have pursued this autumn. Markets currently assign an approximately 88% probability to a 25bps rate hike at the Fed's next meeting, while further increases in January and potentially April are also being priced in.

The US dollar index rose 0.3% to around 102 on Tuesday as stronger-than-expected inflation data reinforced expectations that the Federal Reserve will continue raising interest rates. Consumer prices rose 0.4% in October, more than market expectations of a 0.3% increase, while core CPI advanced 0.3% for a third consecutive month, also above forecasts of a 0.2% rise. Money markets increased bets on at least two additional rate hikes by mid-2027, with investors anticipating another increase at the Fed’s December 8-9 meeting. The BLS could not provide annual comparisons because data collection was disrupted by last year’s government shutdown. Meanwhile, traders also raised expectations for a potential de-escalation in the Middle East after President Donald Trump said further strikes on Iran might not be necessary, although he maintained that the US remained “locked and loaded.”

The US Dollar Index hovered around 101.7 on Tuesday after weakening in the previous session, as investors awaited the October Consumer Price Index report, with both headline and core inflation expected to ease amid stabilizing energy prices. Richmond Fed President Tom Barkin said on Monday that the central bank should proceed “with care” when adjusting monetary policy, highlighting persistent inflation as its biggest concern. Markets are currently pricing in an 84% probability of a Fed rate hike in December, up considerably from around 74% a week earlier following last week’s stronger-than-expected employment data. Meanwhile, demand for the dollar as a safe-haven asset softened as oil prices continued to decline on growing optimism over a potential US-Iran peace agreement. President Donald Trump expressed confidence that the conflict in Iran was nearing an end following discussions with Qatar’s prime minister.