Dollar Pressured by Lower Treasury Yields

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%.

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.