US Dollar Index eases from late July highs as profit-taking kicks in amid sliding yields
- DXY bulls take some profits off the table amid a modest pullback in US bond yields.
- The hawkish Fed outlook and oil-driven inflation fears should limit the slide in yields.
- Geopolitical uncertainties could further lend support to the safe-haven Greenback.
The US Dollar Index (DXY), which tracks the Greenback against a basket of currencies, retreats slightly after hitting a fresh high since late July earlier this Thursday. The index, however, holds above the 100.00 psychological mark heading into the European session. Moreover, a combination of supporting factors backs the case for the emergence of dip-buyers at lower levels.
US Federal Reserve (Fed) Chair Kevin Warsh’s focus on inflation calms the recent selloff in the fixed-income market, triggering a modest pullback in US bond yields and prompting US Dollar (USD) bulls to take some profits off the table. However, the US central bank's hawkish outlook, along with escalating tensions in the Middle East, should act as a tailwind for the Greenback and help limit losses for the DXY.
The Fed voted unanimously to raise interest rates for the first time since 20263 at the conclusion of the September policy meeting on Wednesday. Moreover, the so-called dot plot revealed that Fed officials expect one more interest rate increase this year. This comes amid oil-driven inflation fears and underpins prospects for further Fed tightening, which should continue to lend support to the DXY.
Dollar support builds as Fed’s hawkish risk assessment underpins rate path
Analysts at Danske Bank note that in the US, “the Fed delivered a 25bp rate hike with unanimous support, while the updated dots were modestly hawkish relative to expectations.” They highlight that Fed chairman Warsh “still see[s] monetary policy as accommodating growth,” underscoring the central bank’s view that policy remains supportive even as rates move higher.
Meanwhile, Iran-backed Houthi rebels said that Saudi aircraft have carried out more than 450 air strikes across Yemen in the past week. Meanwhile, US President Donald Trump claimed that Iran wants to strike a deal and that the war may be nearing its end. Nevertheless, intensifying fighting between the Houthi group and Saudi Arabia keeps the geopolitical risk premium in play, which further favors DXY bulls.
Traders now look forward to the US economic docket – featuring the release of the Philly Fed Manufacturing Index, the usual Initial Weekly Jobless Claims, and housing market data later during the North American session. Moreover, fresh developments surrounding the Middle East crisis will influence USD price dynamics and produce short-term opportunities amid a supportive fundamental backdrop.
DXY daily chart
Technical Analysis
The DXY keeps a constructive bullish tone following the recent breakout above the 100-day Exponential Moving Average (EMA) at 99.67. Price is pressing the 50.0% retracement at 100.18, below which the corrective decline could extend to the 38.2% Fibonacci level at 99.79. This is followed by the clustered demand zone formed by the 100-period EMA at 99.67 and the 23.6% retracement at 99.32, ahead of the structural floor at 98.55.
On the topside, the bullish technical setup backs the case for a move toward the 61.8% retracement at 100.56, with further resistance at 101.11 and then the swing high at 101.80.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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