United States Dollar Index strengthens to near 101.50, US ADP and PCE data loom
- US Dollar Index gains ground to around 101.40 in Wednesday’s early European session.
- Hawkish Fed signals and rising Treasury bond yields support the DXY.
- Markets priced in nearly 47.1% probability of a Fed rate hike in October.
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 101.40 in the early European trading hours on Wednesday. The DXY gathers strength and is poised for the largest monthly rise against it in 14 months, bolstered by rising bets of US interest rate hikes.
The heightened expectations for more interest rate hikes from the Federal Reserve (Fed) and rising US Treasury yields lift the US Dollar against its rivals. Chicago Fed President Austan Goolsbee said on Tuesday that inflation remaining above the Fed's target represents a dangerous situation that may require policy action. Meanwhile, Fed Governor Michael Barr warned that further rate increases will likely be needed to slow inflation.
New York Fed President John Williams stated that one more rate hike this year may be appropriate to help contain inflation but added there’s no urgency to act following the central bank’s decision to lift rates this month.
Markets currently see a 47.1% chance of a Fed rate hike in October and a 92.5% odds of an increase in December, according to the CME's FedWatch Tool.
The US ADP employment and Personal Consumption Expenditures (PCE) Price Index reports will be in the spotlight later on Wednesday. Stronger job data or signs of hotter inflation in the US could boost the DXY in the near term.
Attention will shift to the US jobs data for September on Friday. The US economy is expected to see a 90,000 job addition in September, while the Unemployment Rate is projected to remain unchanged at 4.1% during the same period.
USD focus turns to US labour data as Fed tightening risks build
Analysts at OCBC flag this week's US labour market report as "the key event risk," noting that Bloomberg consensus expects "nonfarm payrolls to rise by 90,000 in September, down from 162,000 in August, while the unemployment rate is forecast to remain unchanged at 4.1%." They point out that, while Fed Chair Kevin Warsh has highlighted "the four-week average of initial jobless claims as a timely indicator of labour market conditions," payrolls remain "the market's preferred measure of labour market health."
OCBC observes that "recent claims data have continued to trend lower, suggesting labour market conditions remain firm." In their view, "the risk of an upside payrolls surprise appears to be increasing," and a "stronger-than-expected employment report would likely reinforce expectations of further Fed tightening, keep Treasury yields elevated and provide additional support for the USD."
Barr flags need for further Fed tightening as inflation risks rise
Barr’s speech scores 7/10 on the FXS Speechtracker, only marginally above the 6.9/10 historical average, signaling a tone that is slightly more hawkish but broadly consistent with the established baseline. The emphasis on GDP growth “picking up a bit” from a 2% pace, alongside a solid labor market and AI-driven medium-term productivity optimism, is overshadowed by the warning that inflation risks have increased and that the Fed has been “knocked off course” from the 2% goal, with no clear trend back in sight. The explicit call that policy needs to be “recalibrated” and that further adjustments are likely reinforces a bias toward additional tightening, even as AI is framed as both a future growth driver and a source of near-term labor market disruption.
The FXS Fed Sentiment Index fell by 0.51 points to 146.01, indicating a modest pullback in perceived hawkishness following the speech. Despite the decline, the index remains firmly in hawkish territory well above the neutral 100 mark, underscoring that, relative to the historical baseline, the Fed is still seen as leaning toward further tightening even as the tone eases slightly on the margin.
Technical Analysis: US Dollar Index retains a positive tone amid overbought condition
In the daily chart, the Dollar Index Spot keeps a bullish near-term tone as price holds above both the 100-day simple moving average (SMA) and the Bollinger Bands’ middle line. The index is pressing the upper half of the recent range, while the Relative Strength Index (14) at 71.57 signals overbought conditions, suggesting upside momentum is strong but increasingly stretched.
On the topside, immediate resistance aligns with the Bollinger Bands upper band around 101.95, where bullish attempts could start to meet profit-taking. On the downside, initial support is seen at the 100-day SMA at 100.10, followed closely by the Bollinger middle band at 100.05, while a deeper pullback would expose the lower band region near 98.20 as a more distant demand area.
(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.