Dollar Gains as Euro Comes Under Pressure

The dollar index rose toward 102 on Monday, benefiting mainly from the euro’s weakness following violent protests in France and other European countries and escalating hostilities between Russia and Ukraine. Investors also kept a close watch on developments in the Middle East, where clashes between Saudi Arabia and Iran-backed Houthi rebels in Yemen showed little sign of easing and tanker attacks in the Strait of Hormuz continued. Meanwhile, the dollar weakened on Friday after Federal Reserve Chair Kevin Warsh refrained from signaling the outcome of this month’s FOMC meeting but said that hotter-than-expected inflation had not altered his assessment of the US economy. The Fed has since entered its blackout period ahead of the October 27–28 policy meeting, with markets currently pricing in an approximately 84% chance of interest rates remaining unchanged.

The dollar index fell to 101.6 on Friday, its lowest level in two weeks, and was down around 0.4% for the week, marking its first weekly decline after three consecutive weeks of gains. The greenback came under pressure amid concerns over AI spending in a high-interest-rate environment, which weighed on investor sentiment and triggered a flight to safety early in the week, dragging stocks, bond yields and the dollar lower. On the data front, hotter-than-expected US CPI and PPI readings added to evidence of mounting inflationary pressures. Markets currently price in around an 85% probability of rates remaining unchanged in October, while assigning nearly a 77% chance of a 25bps hike in December. Comments from Fed Chair Warsh at the IMF summit further bolstered expectations of an October rate hold. Warsh declined to signal whether another hike was under consideration, but said hotter-than-expected inflation had not altered his assessment of the US economy.

The US dollar index fell below 102 on Friday, extending losses from the previous session and underperforming other safe-haven assets such as government bonds and precious metals following the recent selloff in technology and artificial intelligence stocks. Markets are increasingly factoring in a potential slowdown in the AI capital expenditure boom, which has been a key driver of the US economy and financial markets. Meanwhile, investors continued to assess the Federal Reserve’s monetary policy outlook, as stronger-than-expected US economic data reinforced expectations of further interest rate hikes. Markets are currently pricing in approximately a 72% probability that the Fed will keep rates unchanged this month, while the likelihood of a December rate hike has risen to 92%. Cleveland Fed President Beth Hammack warned that the central bank might need to raise interest rates more aggressively if public inflation expectations deteriorate significantly.