United States Dollar Index rises to near 99.50 as Fed rate hike bets increase
- US Dollar Index strengthens as markets price in an 87% probability of a quarter-point rate hike following strong inflation data.
- August consumer price index data showed a 0.4% monthly increase, lifting the 12-month rate to 3.4%.
- Core CPI rose 0.3% monthly, surpassing the anticipated 0.2% forecast and bolstering the US Dollar.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is gaining ground for the third consecutive day and trading around 99.30 during Asian hours on Monday.
The Greenback gains support amid aggressive Federal Reserve (Fed) rate-hike bets for Wednesday’s decision following hotter US inflation reports. Financial markets have priced in nearly an 87% probability of a quarter-point rate hike at the Fed's September meeting, up from 59% a week ago, according to the CME FedWatch tool.
The US Consumer Price Index (CPI) accelerated in August, reinforcing expectations that the US central bank will raise interest rates next week. Data released by the Bureau of Labor Statistics on Friday showed that the US CPI rose 0.4% MoM in August, putting the 12-month increase at 3.4%. Both readings came in line with market expectations. Meanwhile, the core CPI, which excludes volatile food and energy prices, increased by 0.3% on a monthly basis, versus 0.2% prior, beating the forecast of 0.2%.
Technical Analysis:
In the daily chart, Dollar Index Spot trades at 99.30, retaining a bearish near-term bias as it holds below the longer-term 50-day Exponential Moving Average (EMA) while only marginally above the short-term nine-day EMA at 99.12. This configuration suggests the broader trend remains under pressure, with recent price action still capped by overhead supply. The 14-day Relative Strength Index (RSI) at 48.04 sits just under the neutral 50 line, hinting at subdued momentum rather than a strong directional impulse.
On the topside, initial resistance is located at the 50-day EMA at 99.63, and a sustained break above this level would be needed to ease the prevailing bearish tone. On the downside, immediate support emerges at the nine-day EMA at 99.12; a daily close beneath this short-term average would reinforce the downside bias and open the door to further weakness in the Dollar Index Spot.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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