The US dollar has firmed ahead of this week’s Federal Reserve meeting. The US Dollar Index (DXY) has rallied more than 0.6% over three sessions to two-week highs above 102.00, as traders bet on a hawkish Fed and look for safety amid tensions in the Middle East.
Three reasons the dollar is bid
1. A possible December rate hike. Markets expect the Fed to hold rates this week, but futures price a high probability of a quarter-point hike in December. Higher expected US rates make dollar assets more attractive.
2. Safe-haven demand. Attacks in the Strait of Hormuz and regional skirmishes have increased demand for the dollar as a safe-haven currency. Higher energy prices linked to the tensions also keep US inflation risks tilted to the upside, which reinforces hawkish Fed expectations.
3. Weakness elsewhere. The euro is weighed down by French fiscal concerns, and the yen remains soft despite BoJ hike expectations.
Treasury yields: a mixed signal
The 10-year US Treasury yield is hovering just below 5%, after its biggest one-day drop in nearly four years last week during a tech-led stock selloff. The 2-year yield, more sensitive to Fed policy, is around 4.7%. If short-term yields rise after the Fed meeting, the dollar may find further support.
Commodities feel the pressure
A stronger dollar tends to weigh on dollar-priced commodities. Silver has fallen below $54 an ounce, toward 11-month lows.
What could stop the dollar rally?
- A Fed statement that downplays the chance of a December hike
- Weak US data, such as ADP employment or durable goods orders
- Easing tensions in the Middle East reducing safe-haven demand
Bottom line: Momentum favours the dollar into Wednesday, but much of the hawkish outlook is already priced in. The Fed’s guidance will decide whether DXY breaks higher or gives back recent gains.
Disclaimer: This article is for informational and educational purposes only and does not constitute financial advice. Trading forex and CFDs carries a high level of risk and may not be suitable for all investors. Market levels quoted are approximate at the time of writing.