Near 101.50: US Dollar Index retreats on Fed rate pause bets and weaker safe-haven demand

October Fed pause expected ahead of a possible December rate rise, weighing on dollar demand.
90.6% probability priced in for an October pause as markets await major US PCE and GDP releases.
Easing immediate US-Iran strike risks weigh on the dollar, while geopolitical uncertainty remains over the post-election period.

101.70 is the approximate level of the US Dollar Index (DXY) during Monday’s Asian session. After advancing the previous day, the index is retreating. It tracks the US Dollar (USD) against six major currencies.

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

Expectations for the Federal Reserve’s next policy steps are putting pressure on the Greenback. Markets expect interest rates to remain unchanged in October, with another increase possible in December. The CME FedWatch Tool puts the implied probability of a pause at the October 27–28 policy meeting at 90.6%, compared with a 79.7% probability of a December rate rise.

An unchanged FOMC policy decision is widely anticipated this week, according to Brown Brothers Harriman’s Elias Haddad. He expects the Fed funds target range to 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 futures prices “imply only 10% odds of a hike this week, with a December 9 rate increase virtually fully priced in.” Haddad argues that this policy stance still supports the Dollar, given resilient US data and continuing inflationary pressure.

This week’s US economic calendar will help investors assess the outlook for interest rates. Particular attention is on Personal Consumption Expenditures (PCE) inflation data and the preliminary third-quarter GDP figures.

Reduced safe-haven demand is also weighing on the US Dollar after 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 about renewed strikes 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.

US Dollar: Key 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 domestic banknotes. No other currency is traded more heavily. Data from 2022 show that it accounts for over 88% of global foreign exchange turnover, equivalent to average daily transactions of $6.6 trillion. After the Second World War, the USD displaced the British Pound as the world’s reserve currency. Gold backed the US Dollar for most of its history, until the Bretton Woods Agreement in 1971 brought the Gold Standard to an end.

How does Federal Reserve policy affect the US Dollar?

Monetary policy is the single biggest influence on the US Dollar’s value. Responsibility for setting it lies with the Federal Reserve (Fed), whose dual mandate is to maintain price stability by controlling inflation and promote full employment. Interest-rate adjustments are its main means of pursuing these goals. If prices rise too rapidly and inflation exceeds the Fed’s 2% target, higher rates help support 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 affect the US Dollar?

The Federal Reserve can resort to printing additional Dollars and implementing quantitative easing (QE) in extreme circumstances. Through QE, it substantially expands the flow of credit through a stalled financial system. This unconventional policy is deployed when banks’ reluctance to lend to one another, driven by fears of counterparty default, causes credit to dry up. It is a last resort when interest-rate cuts alone are unlikely to deliver the required outcome. During the Great Financial Crisis in 2008, the Fed chose QE to address the credit crunch. The process entails creating more Dollars to purchase US government bonds, mainly from financial institutions. A weaker US Dollar is usually the result.

How does Quantitative Tightening affect the US Dollar?

The reverse of this process is quantitative tightening (QT). Under QT, the Federal Reserve ceases bond purchases from financial institutions and allows its holdings to mature without reinvesting the principal in new bonds. This generally supports the US Dollar.