During the Asian session on Monday, October 26, the US Dollar Index retreated following gains in the previous trading day, at one point falling toward 101.57. It is currently trading near 101.70, still lingering close to a three-week low.
Markets expect the Federal Reserve to hold rates steady in October and hike again in December. Trump's decision to rule out an immediate strike on Iran has weakened safe-haven demand, weighing on the dollar, though geopolitical uncertainty remains after the election milestone.
Policy Expectations: October Hold Probability Around 90.6%, December Hike Probability Around 79.7%
Financial markets anticipate that the Federal Reserve will keep rates unchanged in October and may raise rates again in December. According to the CME FedWatch tool, market pricing reflects a probability of approximately 90.6% that the October 27-28 policy meeting will leave rates unchanged, and a probability of about 79.7% for a December rate hike.
Elias Haddad of Brown Brothers Harriman noted that the Federal Open Market Committee is expected to keep policy unchanged this week, with the federal funds target range "steady at 3.75% to 4.00%" after a 25 basis point hike in September. He stated that "several key Fed officials have called for patience, supporting a hold," while futures markets "imply only a 10% chance of a hike this week, with a December 9 hike almost fully priced in."
Against a backdrop of solid US data and persistent inflation pressures, Haddad believes this stance continues to support the dollar.
Data Focus: PCE and Q3 GDP as Key Guides
Investors this week will closely watch two key US macroeconomic releases—the Personal Consumption Expenditures (PCE) price index and the preliminary third-quarter GDP reading.
As the inflation gauge the Fed values most, PCE will directly reflect whether core inflation pressures remain sticky, thereby influencing market judgments on the future rate path. If PCE data exceeds expectations, it could reinforce "higher for longer" rate expectations and provide support for the dollar; conversely, it could intensify discussions of rate cuts or a pause in hikes.
The preliminary Q3 GDP reading will reveal the true strength of US economic momentum, with the breakdown of consumption, investment, and net exports particularly critical. The combined results of these two data points will form an important bridge between the Fed's post-decision policy guidance and market pricing, dominating the dollar's trajectory and the pace of rate expectation adjustments in the near term.
Safe-Haven Demand: Trump Rules Out Immediate Strike on Iran, Dollar Safe-Haven Bids Weaken
On the geopolitical front, safe-haven bids for the dollar have noticeably weakened recently. According to Al Jazeera, US President Trump explicitly ruled out the possibility of immediate military action against Iran, stating that "there will be no strike today," which temporarily eased market tensions.
However, the risks have not truly subsided. Markets remain highly focused on this week's Israeli election results and the policy shifts that may follow next week's US midterm elections, with concerns that military action could resume after the elections. Intelligence reports further indicate that Iran is prepared to retaliate against key regional targets, including Israel and the UAE, should the conflict escalate.
This "deferred but not lifted" state makes it difficult for the safe-haven dollar to attract sustained buying support. Instead, it may come under pressure when risk appetite recovers, exacerbating volatility in currency pairs such as USD/JPY.
Institutional Views
ING pointed out that multiple indicators show the dollar is already overvalued, with net long positioning and options risk reversals also near cyclical highs, though no clear trigger for a reversal has emerged yet. Fed tightening expectations are relatively stickier compared to other central banks, making it difficult for even falling oil prices to significantly weaken the dollar. Weakness in global bond markets continues to support demand for liquidity and defensive currencies.
ING believes that unless there is a shock similar to the 2025 "sell America" episode or a significant macro shift, the dollar's momentum will be hard to reverse easily, with the near-term bias remaining toward high-level consolidation or modest gains.
Paul Mackel, head of global FX research at HSBC, and colleagues believe the dollar's outlook has improved and it is poised to continue a mild upward trajectory. Strong US data and reduced Fed policy uncertainty are the main supports; fiscal and political risks in Europe and the UK provide additional tailwinds for the dollar. HSBC expects the dollar to maintain its advantage over the euro, pound, and yen, potentially lasting at least until the first half of 2027. Although the pace of rate hikes may be less aggressive than market pricing suggests, the "cleanest dirty shirt" status remains, and gradual appreciation is still the base case.
Summary
The US Dollar Index retreated to near 101.50 at one point after gains in the previous trading day, with the core pressure coming from Fed policy expectations: an approximately 90.6% probability of a hold in October and a roughly 79.7% probability of a December hike, with multiple officials calling for patience to support a pause this week.
Meanwhile, Trump's decision to rule out an immediate strike on Iran weakened safe-haven demand, further pressuring the dollar, though geopolitical uncertainty remains after Israel's election and the US midterm elections.
This week's PCE inflation and preliminary Q3 GDP will serve as key guides for judging the subsequent rate path. Short-term dollar movements depend on the tug-of-war between policy expectations and safe-haven sentiment.
(US Dollar Index daily chart, source: Yihuitong)
As of 14:10 Beijing time, the US Dollar Index was at 101.71.
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