US Dollar Index slips to around 101.50 as Fed pause prospects and softer safe-haven demand weigh

Dollar demand softens as the Fed is expected to pause in October, with a further rate hike possible in December.
With key US PCE and GDP releases awaited, markets price in a 90.6% probability that rates will remain unchanged in October.
Easing risks of an immediate US strike on Iran weigh on the Dollar, although uncertainty over the geopolitical outlook beyond the upcoming elections remains.

Trading 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.

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

Expectations for the Federal Reserve’s next policy steps are weighing on the Greenback. Markets foresee unchanged interest rates in October, followed by a possible additional increase in December. Pricing tracked by the CME FedWatch Tool assigns a 90.6% probability to a pause at the October 27–28 policy meeting and a 79.7% probability to a December rate hike.

An unchanged policy decision from the FOMC this week is widely anticipated, according to Brown Brothers Harriman’s Elias Haddad, who expects the Fed funds target range to remain “steady at 3.75-4.00% after raising rates 25bps in September.” In support of that view, he observes that “calls for patience from several key Fed officials support a pause,” and says futures prices “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 amid resilient US economic data and continuing inflationary pressures.

For further clues on the direction of interest rates, investors are watching this week’s major US data releases. These include Personal Consumption Expenditures (PCE) inflation figures and the preliminary estimate of third-quarter GDP.

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

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

US Dollar: Common Questions Answered

What role does the US Dollar play?

As the official currency of the United States of America, the US Dollar (USD) also circulates alongside local banknotes in a significant number of other countries, serving as their ‘de facto’ currency. No other currency is traded as heavily worldwide. Data from 2022 show that it accounts for over 88% of global foreign exchange turnover, equivalent to average daily transactions of $6.6 trillion. The USD replaced the British Pound as the world’s 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 abandoned.

Why do Federal Reserve decisions matter for the US Dollar?

Monetary policy set by the Federal Reserve (Fed) is the single biggest influence on the US Dollar’s value. Adjusting interest rates is the Fed’s main means of meeting its dual mandate: maintaining price stability by controlling inflation and promoting full employment. Inflation above the Fed’s 2% target, coupled with prices rising too rapidly, prompts the central bank to raise rates, supporting the USD. Conversely, inflation below 2% or an excessively high unemployment rate may lead 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 conditions become extreme, the Federal Reserve can print additional Dollars and introduce quantitative easing (QE). Through QE, the Fed sharply expands the supply of credit within a financial system that has become stalled. This unconventional policy is deployed when credit dries up as banks, fearing counterparty defaults, refuse to lend to one another. It serves as a last resort if interest-rate cuts alone are unlikely to deliver the required outcome. During the Great Financial Crisis in 2008, QE was the Fed’s preferred response to the credit crunch. Under this approach, the Fed prints additional Dollars to purchase US government bonds, mainly from financial institutions. The usual effect of QE is a weakening of the US Dollar.

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

By contrast, quantitative tightening (QT) reverses this process: the Federal Reserve ceases bond purchases from financial institutions and refrains from reinvesting the principal repaid on maturing bond holdings in fresh purchases. The US Dollar generally benefits from QT.