Dollar Advances on Middle East Escalation

The dollar index hovered around 102.1 on Wednesday after retreating in the previous session, as investors cautiously awaited September’s consumer inflation data for clues on the Federal Reserve’s next interest rate decision. The greenback faced additional pressure after New York Fed President John Williams indicated that one more rate hike may be appropriate this year, while further tightening would likely be unnecessary in 2027. Meanwhile, Fed Governor Christopher Waller said inflation expectations remained “well anchored.” Further commentaries from Richmond Fed President Thomas Barkin and Fed Vice Chair for Supervision Michelle Bowman are expected later today. Markets are currently pricing in roughly a 77% probability that the Fed will leave rates unchanged this month, while assigning an 88% chance of a rate hike in December.

The dollar index weakened to 102.2 on Tuesday, retreating from 102.6 in the previous session, its highest level in 18 months. The pullback came as oil prices and US Treasury yields declined, while a tech-led sell-off boosted safe-haven demand. Investors are also awaiting key US inflation data this week, including Wednesday’s CPI report, for further clues on the inflation outlook and the Fed’s next policy steps. Meanwhile, traders have scaled back bets on another 25bps rate hike this month, with the probability of such a move standing at around 19%. For December, markets are pricing in a nearly 72% chance of a 25bps increase in the fed funds rate. The greenback weakened broadly, with its steepest losses against the yen after Japan’s wholesale inflation came in below expectations. However, persistent price pressures continued to reinforce expectations of further Bank of Japan rate hikes.

The US dollar index hovered around 102.5 on Tuesday, remaining near its strongest level since April 2025 as investors awaited key inflation reports that could influence the Federal Reserve’s monetary policy outlook. The US consumer price index is due on Wednesday, followed by producer inflation data on Thursday. Markets are currently pricing in roughly an 80% probability that the Fed will leave interest rates unchanged this month, while assigning nearly an 88% chance of a rate hike in December. Investors will also assess existing home sales data and remarks from Fed officials Christopher Waller, Tom Barkin and Susan Collins on Tuesday. The dollar received additional support from safe-haven demand amid rising geopolitical tensions, as the US considers assisting Saudi Arabia in its fight against Iran-backed Houthi militants in Yemen, while the recently announced Russia-Ukraine “energy ceasefire” has already been violated.