United States Dollar Index strengthens above 99.50 as Fed rate hike bets rise
- US Dollar Index strengthens to around 99.60 in Tuesday’s Asian session.
- Expectations of a Fed rate hike rise after recent hot inflation data and rallying oil prices.
- Traders await the Fed interest rate decision later on Wednesday.
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, currently trades near 99.60 in the Asian trading hours on Tuesday. The DXY edges higher on expectations of a US Federal Reserve (Fed) interest rate hike on Wednesday.
Markets are increasingly convinced that the Fed will hike interest rates at its September policy meeting on Wednesday in response to the jump in energy prices that has pushed underlying inflation higher than expected in August.
According to the CME FedWatch tool, money markets pointed to a roughly 92.4% chance of a rate increase, up from around 60% a week ago.
“Markets are now fully pricing in a Fed rate hike following last week’s CPI data. At the same time, the renewed rise in oil prices could reinforce inflation concerns and keep the Fed on a hawkish footing,” said UBS analyst Giovanni Staunovo.
Traders will closely monitor Fed Chairman Kevin Warsh’s press conference following the rate decision as it might offer some hints about the US interest rate outlook. An unchanged decision from the Fed or a dovish hike could weigh on the DXY. On the other hand, hawkish remarks from Fed policymakers could lift the US Dollar in the near term.
Ongoing tensions in the Middle East could boost a safe-haven currency such as the US Dollar. Yemen’s Houthis on Monday claimed to have carried out a large-scale missile and drone attack on a Saudi air base in the southern city of Khamis Mushait.
USD outlook hinges on Fed tone as markets brace for FOMC decision
Strategists at Scotiabank caution that the balance of risks for the USD around this week’s FOMC meeting is skewed to the downside if the Fed underwhelms market expectations. They argue that “an unchanged decision from the Fed would be a shock for markets and a clear negative for the USD,” given how firmly a move is now priced. Even if policymakers do deliver a hike, Scotiabank warns that a “dovish” hike which does not obviously commit to additional moves would also likely weigh on the USD, as investors reassess the durability of any policy-driven support for the currency.
Technical Analysis: US Dollar Index maintains a negative outlook below the 100-day SMA
In the daily chart, the near-term bias of Dollar Index Spot remains mildly bearish as price holds below the 100-day simple moving average (SMA) and the upper Bollinger Band, suggesting the broader recovery is still capped by overhead supply. The Relative Strength Index (14) around 53 hints at stabilizing momentum after earlier weakness, but this improvement alone has yet to shift the structure back into a clear bullish stance while the index trades under its key trend average.
On the topside, immediate resistance appears at the upper Bollinger Band around 99.75, followed by the 100-day SMA near 99.80, where a daily close above would be needed to ease the current bearish tone and open the way toward higher levels. On the downside, initial support is seen at the Bollinger middle band, the 20-day SMA, around 99.15, with further demand expected near the lower Bollinger Band around 98.55, where a break would reinforce downside pressure and signal scope for a deeper pullback.
(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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