Dollar Pressured by Easing Fed Hike Bets

The US dollar index held steady near 101.7 on Thursday, pausing its recent decline as investors prepared for next week’s Federal Reserve policy meeting, where interest rates are widely expected to remain unchanged. Chair Kevin Warsh’s remarks last Friday did little to shift expectations for a rate hold, although markets continued to anticipate a possible rate hike in December amid persistent energy-driven inflation. The European Central Bank and the Bank of Japan are also expected to leave rates unchanged next week. Meanwhile, recent economic data pointed to signs of weakness in the US economy, with September housing starts declining and pending home sales falling to a record low. Oil prices also climbed following a drone strike on Saudi Aramco’s Shaybah field that killed two people, while the US ordered some personnel and family members to leave American embassies in Saudi Arabia, adding to concerns over inflationary pressures.

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.