US Dollar Index rises to near 97.50 due to risk-off sentiment, Fed caution

• US Dollar Index gains ground as Fed Powell emphasized the need to balance persistent inflation with a weakening labor market.

• CME FedWatch tool indicates nearly a 92% possibility of a Fed rate cut in October.

• The Greenback may strengthen further as safe-haven demand rises amid new tariff threats from US President Donald Trump against Russia.

The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is gaining ground after two days of losses and trading around 97.30 during the Asian hours on Wednesday. Traders await the upcoming US Q2 Gross Domestic Product Annualized and Personal Consumption Expenditures (PCE) Price Index data, the Federal Reserve’s preferred inflation gauge, due later in the week.

The Greenback gains ground as the US Federal Reserve (Fed) Chair Jerome Powell struck a cautious note, stressing that the US central bank must weigh stubborn inflation against a softening job market, calling it “a challenging situation” and reiterating comments from last week. However, the CME FedWatch tool suggests that money markets are currently pricing in nearly a 92% possibility of a Fed rate cut in October, up from 90% a day earlier.

The flash reading of the S&P Global Purchasing Managers Index (PMI) showed that business activity in the United States (US) slowed in September. Composite PMI ticked down to 53.6 from 54.6 in August, pointing to a private sector that seems to be struggling to strengthen further. Manufacturing PMI eased to 52.0 from 53, signalling waning momentum in the sector. Services PMI slipped to 53.9 from 54.5, suggesting demand there may be easing.

The US Dollar may further appreciate due to increased safe-haven demand, driven by new tariff threats from US President Donald Trump on Russia. At the United Nations (UN) General Assembly on Tuesday, President Trump warned that the United States (US) is ready to impose a “very strong round of powerful tariffs” if Russia refuses to end the war in Ukraine. Trump also criticized European countries for buying Russian energy, arguing that “they are funding the war against themselves,” and urged the EU to join Washington in implementing tariffs to ensure their effectiveness.