Dollar Holds Firm Ahead of Fed Meeting

The dollar index traded around 101.5 on Tuesday, holding onto the previous session’s gains as investors awaited the Federal Reserve’s policy decision, with markets pricing in an over one-third chance of a rate hike. That marks an unusually high level of uncertainty this close to a Fed meeting compared with recent years. Citadel Securities also said it expects the Fed to raise interest rates this week to reinforce Chairman Kevin Warsh’s inflation-fighting credibility after the central bank chief repeatedly pledged to restore price stability. Meanwhile, the probability of a Fed rate hike in September currently stands at around 56%. The dollar also remained resilient even after President Donald Trump said the US was engaged in "good talks" with Iran to end the Middle East conflict, a development that pushed oil prices lower and eased concerns over inflation and tighter monetary policy.

The dollar index pared early losses to trade little changed around 101.4 on Monday, hovering near a one-month high as developments in the Middle East continued to dominate market sentiment. The US suspended its nearly two-week campaign of strikes against Iran late on Friday. In response, Tehran halted its retaliatory military operations and held talks with Oman on ensuring the safe passage of shipping through the Strait of Hormuz. These developments triggered a decline in oil prices, easing concerns over further supply disruptions and a renewed inflationary spiral. As a result, investors scaled back expectations for Fed policy tightening. The central bank is widely expected to leave the federal funds rate unchanged, although markets currently assign around a 33% probability to a rate hike. Looking ahead, a September increase remains the base case, with traders pricing in nearly an 80% chance of such a move.

The dollar index slipped to around 101.2 on Monday, giving back some of last week's gains as oil prices retreated following a pause in hostilities between the US and Iran over the weekend, easing concerns over supply disruptions and inflation. The US suspended its nearly two-week campaign of strikes against Iran beginning late Friday without an official announcement, while Tehran said it had ended its retaliatory military operations and held discussions with Oman over the Strait of Hormuz. Meanwhile, investors are preparing for the Federal Reserve's policy meeting this week, where officials are widely expected to leave interest rates unchanged. However, some market participants believe the central bank could act as early as this week's meeting in response to renewed inflationary pressures. Investors are also awaiting advance Q2 GDP figures and PCE inflation data, as well as earnings from major US companies for fresh insights into the strength of the economy.