US Dollar Index falls to near 101.50 amid Fed rate pause odds, easing safe-haven demand
- Fed expected to hold rates steady in October before a potential December hike, lowering dollar demand.
- Markets anticipate a 90.6% chance of an October pause while awaiting key US PCE and GDP data.
- Dollar weakens as immediate US-Iran strike risks abate, though geopolitical uncertainty persists after upcoming elections.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is losing ground after registering gains in the previous day and trading near 101.70 during Asian hours on Monday.
The Greenback is facing downward pressure due to market expectations surrounding the Federal Reserve’s upcoming policy path. Financial markets anticipate that the Fed will hold interest rates steady in October before potentially pursuing another rate hike in December. According to the CME FedWatch Tool, market pricing reflects a 90.6% probability of a rate pause at the October 27–28 policy meeting, alongside a 79.7% chance of a rate increase in December.
Brown Brothers Harriman’s Elias Haddad notes that the FOMC is widely expected to leave policy unchanged this week, with the Fed funds target range “steady at 3.75-4.00% after raising rates 25bps in September.” He points out that “calls for patience from several key Fed officials support a pause,” while the futures market “imply only 10% odds of a hike this week, with a December 9 rate increase virtually fully priced in.” Against a backdrop of firm US data and persistent inflation pressures, Haddad argues this stance continues to underpin the Dollar.
Investors are closely monitoring key US economic releases scheduled for this week, specifically the Personal Consumption Expenditures (PCE) inflation data and preliminary third-quarter GDP figures, to gauge future rate moves.
Simultaneously, the US Dollar is struggling as safe-haven demand eases following recent comments from US President Donald Trump. Citing reports from Al Jazeera, President Trump ruled out immediate military action against Iran, clarifying that "there will not be a strike today."
Despite this temporary pause, market anxiety remains elevated over the risk of strikes resuming after this week’s Israeli elections and next week’s US midterm elections. Intelligence reports indicate that Iran is prepared to retaliate by targeting key regional sites in Israel and the United Arab Emirates should military operations restart.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.