Dollar Index Treads Water

The US dollar index was little changed around 102.1 on Friday but remained on track for a nearly 0.2% weekly gain, marking its fourth consecutive week of advances and pushing the greenback to its highest level since April 2025. Investors continued to assess developments in the Middle East and their implications for energy prices and inflation. Oil prices eased after US President Trump pledged to refrain from attacking Iran until after the midterm elections, helping to ease concerns over further energy supply disruptions. Nevertheless, markets continued to price in the prospect of the Federal Reserve keeping interest rates higher for longer to contain persistent inflationary pressures. The probability of the Fed holding rates steady this month stood at around 81%, while the odds of a 25bps rate hike in December were approximately 69%.

The US dollar index slipped to around 102 on Friday, extending losses from the previous session as Treasury yields declined following a well-received 30-year bond auction, suggesting investors remain willing to purchase long-dated government debt despite the recent market selloff. Investors also assessed lower oil prices after President Trump said the US was engaged in “productive discussions” with Iran and would refrain from attacking the country before the midterm elections. Meanwhile, markets are pricing in roughly an 82% probability that the Federal Reserve will keep interest rates unchanged this month, while the odds of a December rate hike stand at around 81%. On Thursday, Fed Governor Christopher Waller said further rate increases would likely be necessary to bring inflation back to the central bank’s 2% target, but noted that policymakers had “flexibility” in determining the pace of tightening and left open the possibility of a pause at the Fed’s upcoming October meeting.

The dollar index was little changed at 102.2 on Thursday, hovering near April 2025 highs, as the greenback remained supported by expectations that the Fed will need to keep interest rates elevated for longer. Oil prices moved higher again, adding to inflationary pressures and, in turn, reinforcing expectations of further Fed tightening. Minutes from the Fed’s September meeting showed that most policymakers expect another increase in the federal funds rate this year, although the timing remains uncertain. Fed Governor Waller said on Thursday that additional rate hikes will likely be needed to bring inflation back to target, while emphasizing that there is “flexibility” around the pace of increases. Markets currently price in an around 78% probability that the Fed will leave rates unchanged in October, while the odds of a 25bps hike in December stand at around 69%. Meanwhile, higher government bond yields in Europe continued to weigh on the euro.