Safe-haven demand keeps United States Dollar Index steady

The US Dollar Index holds largely steady as diplomatic efforts to resolve the Middle East conflict reduce demand for safe-haven assets.
Support for the US Dollar could come from resilient US economic readings and strong expectations of a Fed rate hike.
A December rate hike carries roughly a 75% probability in market pricing, according to the CME FedWatch Tool.

The US Dollar Index (DXY) holds its ground near 102.00 in Monday’s Asian session, following a modest advance the previous day. The index tracks the US Dollar (USD) against a basket of six major currencies.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Softer safe-haven demand is keeping the Greenback largely unchanged as diplomatic initiatives to end the Middle East conflict continue, although concerns about renewed US military action against Iran persist. For a third consecutive day, Qatari and Iranian officials held talks aimed at securing an agreement to end the war before the US midterm elections.

Growing expectations of a Federal Reserve rate hike could, however, help the US Dollar recover ground. Recent US macroeconomic releases have signalled a resilient economy and persistent inflation, supporting those expectations. The CME FedWatch Tool shows traders assigning roughly a 75% probability to a rate increase in December.

Attention now turns to forthcoming releases, notably the US Nonfarm Payrolls (NFP) report and ISM manufacturing and services readings. Several Federal Reserve officials are also due to speak during the week, with their comments expected to provide additional indications of the central bank’s monetary policy trajectory.

How does stalled inflation progress in US PCE data reshape the Dollar outlook?

Stalled disinflation continues to support the Dollar in Brown Brothers Harriman’s assessment, even as investors increasingly turn to wage trends and the broader growth outlook. The bank says the latest US September PCE report “confirms that progress on inflation has stalled.” It points out that the figures matched consensus: “headline PCE rose 0.5% m/m vs. +0.3% in August to be up 3.6% y/y vs. 3.4% in August,” while “core PCE was up 0.3% m/m vs. 0.3% in August to be up 3.1% y/y vs. 3.0% in August.” Persistent inflation across both headline and core readings strengthens the bank’s view.

US Dollar: frequently asked questions

What role does the US Dollar play?

As the official currency of the United States of America, the US Dollar (USD) also serves as the ‘de facto’ currency in a significant number of other countries, circulating alongside their local banknotes. Data from 2022 show that it accounts for over 88% of global foreign exchange turnover, equivalent to average daily transactions of $6.6 trillion, making it the world’s most actively traded currency. The USD replaced the British Pound as the global reserve currency after the Second World War. Gold backing characterised most of the US Dollar’s history, ending with the Bretton Woods Agreement in 1971, when the Gold Standard was abolished.

How does Federal Reserve policy affect the US Dollar?

Monetary policy set by the Federal Reserve (Fed) is the single biggest influence on the US Dollar’s value. Maintaining price stability by controlling inflation and promoting full employment are the Fed’s two mandates. Interest-rate adjustments are its main means of pursuing these objectives. To counter prices rising too rapidly and inflation exceeding its 2% target, the Fed raises interest rates, supporting the USD. Conversely, inflation below 2% or an excessively high Unemployment Rate may prompt the Fed to cut rates, putting pressure on the Greenback.

How does Quantitative Easing work, and what does it mean for the US Dollar?

When circumstances are extreme, the Federal Reserve can print additional Dollars and introduce quantitative easing (QE), substantially expanding credit flows through a stalled financial system. This unconventional policy is deployed when credit dries up as banks refuse to lend to one another for fear of counterparty default. Used as a last resort when interest-rate cuts alone are unlikely to deliver the required outcome, QE was the Fed’s preferred response to the credit crunch during the Great Financial Crisis in 2008. Under this approach, the Fed prints more Dollars to purchase US government bonds, mainly from financial institutions. The US Dollar typically weakens as a result of QE.

How does Quantitative Tightening work, and what does it mean for the US Dollar?

In the reverse process, known as quantitative tightening (QT), the Federal Reserve ceases bond purchases from financial institutions. It also refrains from reinvesting the principal repaid on its maturing bond holdings in new purchases. This generally supports the US Dollar.