United States Dollar Index gains ground ahead of Fed interest rate decision
- US Dollar index rises as markets price in a 92.4% chance of a 25 bps rate hike on Wednesday.
- Higher oil prices following Saudi pipeline closures threaten to prolong aggressive Fed tightening.
- Traders await press conference signals regarding potential future rate increases in October or December.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is continuing its winning streak for the sixth consecutive day and trading around 99.70 during Asian hours on Wednesday. Traders await the US Federal Reserve’s (Fed) interest rate decision scheduled later in the day.
Hotter-than-expected US inflation data released last week has reinforced expectations that the central bank will move forward with a rate hike. Financial markets broadly anticipate that the Fed will raise the benchmark overnight interest rate by 25 basis points to a range of 3.75% to 4.00%, while signaling that further monetary tightening remains ahead. According to the CME FedWatch tool, markets are now pricing in nearly a 92.4% probability of a quarter-percentage-point rate increase at Wednesday's policy meeting.
Energy markets are further fueling inflation concerns after oil prices pushed higher following Saudi Arabia's emergency closure of a key pipeline bypassing the Strait of Hormuz. Because sustained energy cost increases feed directly into broader consumer inflation, higher oil prices could push the Fed toward maintaining an aggressive interest rate trajectory.
Attention will shift to Fed Chairman Kevin Warsh’s post-decision press conference for clearer hints regarding the future direction of US monetary policy. Market participants will be parsing his comments closely, as expectations build for additional interest rate adjustments in October or December.
Technical Analysis:
In the daily chart, the Dollar Index Spot trades at 99.70, holding a modest bullish bias as price sits above both the 50- and nine-period Exponential Moving Averages (EMAs). The short-term upturn is reinforced by a 14-day Relative Strength Index (RSI) around 56, which stays in positive territory without yet signaling overbought conditions, while the FXS Fed Sentiment Index stabilizing near 125.7 hints that policy expectations are no longer exerting strong downside pressure on the index.
On the downside, immediate support is provided by the 50-EMA at 99.64, with the nine-EMA at 99.35 offering a secondary floor should a deeper pullback unfold. As long as the index holds above these moving average supports, the near-term constructive tone is likely to persist, keeping the focus on further recovery attempts toward higher levels not yet clearly defined on this chart.
(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.