• US Dollar Index gains as markets price in a 56.5% chance of another rate increase in October.
• Fed Chair Kevin Warsh stresses that persistent inflation remains too high, signaling further tightening.
• Kashkari stressed that persistent inflation remains too high despite robust growth and a strong labor market.

The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is gaining ground after two days of losses and trading around 100.30 during Asian hours on Monday.

The Greenback holds ground amid hawkish sentiment surrounding the Federal Reserve (Fed) policy outlook. Last week, the US Federal Reserve delivered a 25-basis-point rate hike, its first hike in three years, as officials sought to curb inflation and flagged more hikes in the coming months.

Fed Chair Kevin Warsh said that "the plain fact is that inflation is too high and has been for too long." "This summer's inflation readings do not tell me that underlying trends have meaningfully improved," he added. Markets are now pricing in nearly a 56.5% chance of another US rate hike when the Fed meets next in October, compared with nearly 42.5% a week ago, according to the CME FedWatch tool.

Strategists at Scotiabank note that the US Dollar ended the previous week on a solid footing, with the “USD … mixed to slightly firmer on Friday so far to round off the week of broad gains.” They highlighted the Japanese Yen as “the main mover overnight,” pointing out that the JPY “has weakened more than 1% in the wake of the BoJ policy decision (25bps hike, as expected, but with two dissenters) and Governor Ueda’s mixed press conference.” Scotiabank adds that the pressure on the currency has been sustained, with the “JPY has slipped more than 2% on the week to a two-week low,” underscoring the contrast between a generally firm Dollar and a notably softer Yen into the weekend.

Technical Analysis:

In the daily chart, Dollar Index Spot trades at 100.30, keeping a constructive bullish tone as price holds above both the nine- and 50-period Exponential Moving Averages (EMAs). The short-term EMA runs above the longer one, and both slope gently higher, suggesting an advancing trend, while the Relative Strength Index (14) at 62.6 sits in positive territory without yet signaling overbought conditions, hinting that upside momentum remains supportive.

On the downside, initial support is seen at the nine-day EMA near 99.85, with the 50-day EMA at 99.73 providing a deeper layer of demand if a pullback extends. As long as the index defends this moving-average band, dips are likely to be viewed as corrective within the broader upmove, and only a clear break below the 50-EMA would start to undermine the current bullish bias.

Kashkari keeps hawkish bias as resilient growth sustains inflation risks

Kashkari’s latest remarks score 6.2 on the FXS Speechtracker, essentially in line with the 6.3 historical average and signaling a steady hawkish tone. Emphasis that inflation “remains too high,” extends beyond oil, and must be addressed even as growth, productivity and the labor market stay robust underscores a message of persistent price pressures amid resilient activity. By stressing that the bond market is the Treasury’s responsibility while hoping growth can help reduce inflation, the speech leans toward sustained policy vigilance rather than a quick pivot.

The FXS Fed Sentiment Index fell by 1.47 points to 150.61, indicating a modest pullback in perceived hawkishness even as the gauge remains firmly above the neutral 100 line. This keeps the overall stance in clearly hawkish territory, suggesting that despite a slight softening in tone, markets still see the Fed as biased toward tighter policy according to the FXS Fed Sentiment Index and FXS Speechtracker.

(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.

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.