US Dollar Index retreats to near 101.50 as Fed rate pause prospects and softer safe-haven demand weigh

• An expected October rate hold by the Fed, ahead of a possible December increase, weighs on dollar demand.
• A 90.6% probability of an October pause is priced into markets as investors await key US PCE and GDP releases.
• Dollar retreats as the immediate risk of US strikes on Iran recedes, although uncertainty remains over the geopolitical outlook after the forthcoming elections.

At around 101.70 in Monday’s Asian session, the US Dollar Index (DXY) is retreating after the previous day’s advance. The index tracks the US Dollar (USD) against a basket of six major currencies.

Expectations for the Federal Reserve’s next policy steps are weighing on the Greenback. Investors expect interest rates to remain unchanged in October, with a further increase possible in December. The CME FedWatch Tool puts the market-implied probability of a pause at the October 27–28 policy meeting at 90.6%, while pricing indicates a 79.7% chance of a December rate rise.

With the FOMC widely expected to leave policy on hold this week, Elias Haddad of Brown Brothers Harriman says the Fed funds target range should remain “steady at 3.75-4.00% after raising rates 25bps in September.” In his assessment, “calls for patience from several key Fed officials support a pause,” while pricing in the futures market would “imply only 10% odds of a hike this week, with a December 9 rate increase virtually fully priced in.” Haddad maintains that this policy stance remains supportive of the Dollar, given resilient US data and continuing inflationary pressures.

To assess the likely direction of interest rates, investors are watching this week’s major US economic releases: Personal Consumption Expenditures (PCE) inflation data and the preliminary GDP figures for the third quarter.

An easing in safe-haven demand is also putting pressure on the US Dollar following recent remarks by US President Donald Trump. According to reports from Al Jazeera, President Trump dismissed the prospect of immediate military action against Iran, stating that "there will not be a strike today."

The temporary reprieve has not dispelled market concerns that strikes could resume after this week’s Israeli elections and next week’s US midterm elections. According to intelligence reports, Iran is ready to retaliate against key regional sites in Israel and the United Arab Emirates if military operations resume.