United States Dollar Index gathers strength to near 100.50 on hawkish Fed signals
- US Dollar Index strengthens to around 100.45 in Tuesday’s early European session.
- Fed policymakers signaled another potential rate increase before the end of the year, supporting the DXY.
- Traders await developments on potential US-Iran talks.
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 100.45 in the early European trading hours on Tuesday. The DXY gains momentum as the US Federal Reserve (Fed) delivers a rate hike and signals more rate hikes this year.
Last week, the US central bank unanimously raised its benchmark interest rate by 25 basis points (bps), bringing the target range to 3.75% to 4.00%. This marked the Fed's first rate hike in three years. Fed Chair Kevin Warsh said during the press conference that “the plain fact is that inflation is too high and has been for too long.” “We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed,” he added.
Traders are now pricing in roughly 56.5% odds for a rate hike of at least 25 bps at the Fed's October meeting, according to the CME FedWatch tool, up from 43.5% a week earlier.
On Monday, St. Louis Fed President Alberto Musalem said that additional rate increases may be necessary to achieve the Fed’s inflation target. Chicago Fed President Austan Goolsbee stated that the central bank cannot overlook repeated and persistent supply shocks.
Traders will closely monitor the developments on potential US-Iran talks at the United Nations General Assembly on Tuesday. President Masoud Pezeshkian will lead an Iranian delegation at the UN session in New York amid renewed hopes for a diplomatic solution to the Middle East conflict.
US President Donald Trump signalled that he is “probably open to meeting Pezeshkian during the assembly. Any signs of progress between the US and Iran talks could improve risk sentiment and weigh on the DXY.
Fed and ECB speakers in focus as markets track policy tone
Deutsche Bank flags a busy day for monetary policy commentary, noting that, beyond scheduled data releases, attention will turn to a slate of central bank speakers. The bank highlights that “we’ll hear from Fed’s Vice Chair Jefferson, the Fed’s Williams and Barkin, ECB President Lagarde, and the ECB’s Kaasik, Nagel, Kocher, Seijpen and Simkus,” suggesting that markets will be closely watching any guidance on the policy outlook from both sides of the Atlantic.
Musalem leans more hawkish as inflation risks call for earlier, incremental hikes
Musalem’s speech scores 8/10 on the FXS Speechtracker, modestly above the 7.4/10 historical average and signaling a firmer hawkish tilt relative to the established baseline. The warning that without further policy restraint inflation is likely to remain substantially above the 2% target over the next 18 months, even with core pressures still “too high” around 3% and businesses planning price increases closer to 3%, underscores a clear preference for additional rate hikes that are “earlier and incremental” to counter both demand- and supply-driven inflation, including broader commodity shocks beyond oil. The characterization of a labor market around full employment but not the main source of inflation pressure suggests policy is aimed squarely at persistent price dynamics rather than overheating employment.
The FXS Fed Sentiment Index rose by 0.42 points to 149.96, reinforcing that the broader Fed tone remains deeply in hawkish territory well above the neutral 100 threshold. This incremental uptick, aligned with the stronger-than-average FXS Speechtracker score, confirms that Musalem’s remarks contribute to a sustained bias toward tighter policy, a backdrop typically supportive of the Dollar against lower-yielding peers.
Technical Analysis: US Dollar Index keeps a bullish vibe above the 100-day SMA
In the daily chart, the near-term bias of Dollar Index Spot is bullish as price holds above the 100-day simple moving average (SMA) and the Bollinger middle band, keeping the recent recovery well supported. The upper Bollinger band acts as immediate overhead resistance, while a Relative Strength Index (14) reading near 65 suggests firm positive momentum without yet reaching overbought conditions.
On the downside, initial support is located at the 100-day SMA at 99.90, followed by the Bollinger middle band at 99.50, with deeper support at the lower Bollinger band around 98.45. On the topside, a clear break above the upper Bollinger band near 100.60 would open the door for further gains, reinforcing the bullish bias as long as price continues to trade above the clustered moving-average support.
(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.