US Dollar Index Extends Pullback

The dollar index fell to 101.2 on Wednesday, extending the pullback after testing a 15-month high of 101.6 on the prior session after the Federal Reserve held interest rates unchanged. Around one-third of the market had positioned for a hike by the central bank, as mounting pro-inflationary risks and the backdrop of a strong labor market supported the case for hawks in the FOMC. Accordingly, three members of the committee dissented in favor of a hike. The pullback in the dollar took place despite a fresh surge in oil prices as strikes between the US and Iran magnified the risk of a prolonged energy shortage from the Middle East. The implication of higher energy prices on interest rates was transmitted to other G10 currencies later in the month, with soaring natural gas prices supporting the euro and the yen. In turn, the sterling extended its outperformance this year ahead of a likely Bank of England hold.

The dollar index held slipped to around 101.4 on Wednesday, sliding for the second straight session as investors cautiously awaited the Federal Reserve’s upcoming policy decision, where it is expected to leave interest rates unchanged. However, markets continue to price in about a one-third chance of a 25-basis-point rate hike, reflecting an unusually high level of uncertainty this close to a decision compared with recent years. Traders also see roughly an 80% probability of a rate increase in September, reinforcing expectations that borrowing costs could stay elevated. Meanwhile, investors also monitored rebounding oil prices and renewed inflation concerns after fresh hostilities flared in the Middle East. The US military said it had successfully intercepted what it described as a surprise Iranian attack targeting US troops stationed across the Middle East, reigniting regional tensions.

The dollar index softened to 101.3 on Tuesday after testing a 15-month high of 101.6 in the previous session as softer energy prices limited the outlook of a rate hike by the Federal Reserve this year. US officials stressed that a diplomatic resolution may still be achieved with Iran in their war, driving fuel prices to ease off their local peaks and trimming the risk of a rebound in energy inflation. Still, fuel prices remained elevated in a historical level as exports from the Middle East are still low. A portion of FOMC members had recently signaled that higher inflation and evidence of a robust labor market could warrant higher rates. The Federal Reserve is expected to hold its policy rates unchanged tomorrow, but rate futures continued reflect the consensus of a hike this year. The greenback held recent gains against the euro and the yen, although political volatility in the UK maintained the sterling's recent appreciation.