United States Dollar Index approaches yearly peak on hawkish Fed outlook

• The US Dollar Index approaches its year-to-date high as expectations of further Fed rate hikes support the Greenback.
• Elevated Oil prices amid the Middle East conflict keep inflation risks tilted to the upside.
• Traders now await US PCE inflation, ISM PMI and Nonfarm Payrolls for fresh clues on the Fed’s next move.

The US Dollar Index (DXY) extends gains on Tuesday, approaching its year-to-date high as expectations of further Federal Reserve (Fed) interest-rate hikes drive strong demand for the Greenback. At the time of writing, the DXY, which tracks the US Dollar’s value against a basket of six major currencies, trades around 101.40, up 0.20% on the day.

The Fed delivered a 25-basis-point (bps) rate hike earlier this month, lifting the federal funds target range to 3.75%-4.00%. The updated Summary of Economic Projections placed the median policy rate at 4.1% for this year, suggesting that officials expect to deliver one more increase.

The US central bank remains focused on inflation, which continues to run stubbornly above its 2% target. Its inflation fight is becoming increasingly challenging as the war in the Middle East keeps Oil prices elevated. The United States and Iran remain far apart on key issues, leaving shipping through the Strait of Hormuz disrupted.

Recent Fed communication also suggests that policymakers remain open to further monetary policy tightening. Fed Governor Michael Barr said on Tuesday that “inflation is a key concern” and that the central bank has been “knocked off course” from its 2% goal.

“I see us not getting to the 2% inflation target in a timely way unless we adjust our policy,” Barr said. He added that the labour market remains “solid,” supported by business investment and consumer spending.

Separately, New York Fed President John Williams said that he sees “no need for urgency” following September’s rate hike. However, he added that “if the economy meets expectations, one further hike is likely this year.” According to the CME FedWatch Tool, markets are pricing in around a 68% probability of another interest-rate increase at the Fed’s October meeting.

Expectations of higher US interest rates and heightened inflation risks have pushed Treasury yields to multi-year highs. The benchmark 10-year US Treasury yield climbs to around 5.28%, its highest level since 2007, while the rate-sensitive 2-year yield holds near 4.93%, levels last seen in 2024. Higher Treasury yields increase the appeal of US Dollar-denominated assets and provide additional support to the Greenback.

The US Dollar’s strength is visible across major currency pairs. The Euro falls to its lowest level since late June, with EUR/USD trading near 1.1340. The British Pound remains close to a three-month low, while the Canadian Dollar weakens to levels last seen in early July. The Japanese Yen holds relatively firm following renewed warnings that Japanese authorities could intervene in the currency market again.

Traders largely shrugged off weaker-than-expected second-tier US economic data released on Tuesday. JOLTS Job Openings fell to 7.079 million in August, below the market forecast of 7.23 million. The previous reading was revised higher to 7.335 million from 7.271 million.

The Conference Board Consumer Confidence Index also declined to 81.9 in September, missing expectations of 89.0. The August reading was revised lower to 88.6 from 89.4.

Attention now turns to the US Personal Consumption Expenditures (PCE) Price Index, ISM Manufacturing Purchasing Managers’ Index (PMI) and Nonfarm Payrolls (NFP) report later this week. Strong inflation or labour-market figures could reinforce expectations of further Fed tightening and push the US Dollar Index toward fresh yearly highs.