Dollar Set for Strong Monthly Advance

The dollar index traded around 101.4 on Wednesday and was on track to gain roughly 2% for the month, supported by concerns over persistent energy-driven inflation, a resilient US economy and hawkish signals from Federal Reserve officials that strengthened expectations for further rate hikes. Oil prices remain elevated as US-Iran negotiations remain deadlocked, although signs of improving energy flows from the Middle East have eased supply concerns. Meanwhile, Fed Governor Michael Barr reiterated his view that additional rate increases will likely be necessary to curb inflation, while New York Fed President John Williams said another rate hike “late this year” could be appropriate. Markets are currently pricing in nearly one percentage point of Fed rate increases over the next 12 months. Investors now await Wednesday’s PCE price index report, the Fed’s preferred inflation gauge, followed by Friday’s closely watched monthly jobs report for further guidance.

The dollar index strengthened to 101.4 on Tuesday, extending a 0.2% gain in the previous session and trading at three-month highs, as the greenback continued to benefit from expectations of further Fed tightening. Little progress has been made in US-Iran talks aimed at ending the conflict and fully reopening the Strait of Hormuz. A decline in oil prices on Tuesday did little to ease concerns that still-elevated energy costs could fuel inflation and prompt further Fed rate hikes. Meanwhile, strong US economic activity is also supporting the dollar. Job openings and consumer confidence released today, however, surprised on the downside. The PCE inflation report tomorrow and the jobs report on Friday should provide further clarity on the strength of the US economy. Swaps traders are pricing in nearly a full percentage point of Fed rate hikes over the coming year. The greenback is up 1.8% in September but is little changed in the third quarter.

The dollar index traded around 101.2 on Tuesday, remaining near two-month highs amid expectations that the Federal Reserve will tighten policy further to combat energy-driven inflation from persistent US-Iran uncertainty. Oil prices extended their gains after Iranian officials reportedly questioned the prospects of reaching an agreement before the US midterm elections in November, following President Donald Trump’s rejection of Tehran’s latest proposal. Treasury yields also remained at multi-decade highs, with both the 10- and 30-year yields climbing above 5%. Markets are currently pricing in roughly a 70% probability of a Fed rate increase in October, following the central bank’s first rate hike in three years earlier this month. Meanwhile, Fed Governor Lisa Cook said potential productivity gains from artificial intelligence may not be sufficient to offset near-term price pressures, warning that this could contribute to broader inflation across the economy.