Dollar Extends Gains on Hawkish Fed Remarks

The dollar index was little changed at around 101.6 on Friday, hovering near three-week lows and down nearly 0.2% on the week. Cautious sentiment persisted amid further gains in oil prices and concerns over a potential escalation of hostilities in the Middle East, while the US midterm elections are now less than two weeks away. Meanwhile, concerns over heavy AI-related spending continued to weigh on sentiment. The Fed is set to announce its monetary policy decision next week, with markets pricing in a roughly 91% probability of rates remaining unchanged. Meanwhile, the probability of a 25bps rate hike in December stood at around 76%. Among major currencies, the Japanese yen strengthened against the dollar, benefiting from its safe-haven appeal. The euro, by contrast, edged lower as political uncertainty in France and continued selling pressure in the country's bond market weighed on the common currency.

The US dollar index hovered around 101.6 on Friday, remaining near a three-week low as Treasury yields fell sharply on safe-haven flows, pressuring the greenback. The benchmark 10-year Treasury yield dropped by more than 10 basis points to below 5% on Thursday, reaching a one-month low as a deepening selloff in technology and artificial intelligence stocks fueled demand for government bonds. Growing concerns over the sustainability of AI investments, a key driver of US economic growth, also prompted markets to reduce expectations for further Federal Reserve rate hikes. Markets are now pricing in roughly a 91% probability that the Fed will leave interest rates unchanged next week, while the likelihood of a rate increase in December stands at around 80%. The dollar suffered significant losses against the yen, which typically attracts safe-haven demand during periods of heightened market uncertainty.

The dollar index traded little changed around 101.7 on Thursday, hovering near three-week lows as concerns over the sustainability of the AI trade mounted after earnings from several megacap companies failed to impress investors. Meanwhile, geopolitical tensions in the Middle East intensified, with reports suggesting that the US and Israel are preparing further strikes on Iran after the midterm elections. Risk aversion and safe-haven demand dominated markets on Thursday, supporting the Japanese yen and Swiss franc against the US dollar, while the euro was among the weakest-performing major currencies. Meanwhile, the Federal Reserve is set to announce its monetary policy decision next week. Markets are pricing in an approximately 89% probability that the Fed will leave interest rates unchanged, while the odds of a 25bps rate hike in December have risen to around 76%.