During Tuesday's Asian session (November 3), the dollar index traded in a narrow range around 101.75. Overnight, the dollar index briefly fell to around 101.41, marking its lowest level since early October. Traders maintained a cautious stance ahead of the midterm elections, which limited the dollar's decline. Elevated energy prices linked to tensions with Iran have increased political pressure on President Trump and the Republican Party. Meanwhile, prediction markets currently reflect approximately a 74% probability that Democrats will win the Senate, underscoring the high political stakes of this vote.
Safe-Haven Demand: Qeshm Island Strike Provides Support
The dollar continues to draw support from safe-haven demand triggered by escalating military hostilities. According to reports, the United States launched a strike on Iran's Qeshm Island on Monday, the latest in a series of covert, limited strikes carried out by Washington in recent weeks. These military actions came shortly after Trump downplayed the possibility of a full-scale return to conflict with Iran after the elections. For markets, the coexistence of limited strikes and diplomatic engagement gives the dollar dual support from both a safe-haven premium and policy uncertainty.
Elections and Interest Rates: Uncertainty Supports the Dollar, Rate Hike Expectations Remain Elevated
Beyond the elections, market participants are closely watching the U.S. employment report due later this week. The data is expected to provide fresh insight into the health of the labor market and help shape expectations for future monetary policy decisions. The Federal Reserve has maintained a hawkish stance, and the CME FedWatch tool currently prices in approximately a 73% probability of a rate hike in December, following the Fed's decision to hold steady at its October meeting. Persistently high energy prices continue to fuel inflation concerns, which is the core reason rate hike expectations remain elevated.
Two-Way Pressure on the Dollar: Policy Patience and AI Concerns Push Treasury Yields Lower
According to strategists at a prominent institution, the dollar and short-term Treasury yields lost some momentum last week as Fed Chairman Warsh "maintained a patient tone amid stalled inflation progress," causing both the dollar and short-term Treasury yields to move lower. They added that "growing concerns about a slowdown in AI investment exacerbated this move, casting doubt on the U.S. growth outlook and dampening rate hike expectations," reinforcing a softer tone for the dollar and front-end yields. This offsets the safe-haven bid — the former suppresses dollar upside while the latter provides downside support, which is precisely why the dollar index's decline has not widened further.
Employment Data: Nonfarm Payrolls and Unemployment Rate Are the Next Test
Strategists at one institution view Friday's October nonfarm payrolls report as a critical test of the U.S. labor narrative, noting that the market consensus expects "nonfarm payrolls to increase by 65,000, up from 29,000 in September, consistent with a judgment that labor demand is stabilizing." The institution pointed out that "the unemployment rate is expected to remain at 4.2%, 0.1 percentage points above the FOMC's 2026 forecast of 4.1%," highlighting a background slightly softer than the Fed's longer-term view. Wage dynamics are also in focus: "average hourly earnings are expected to rise 0.3% month-over-month, up from 0.1% in September; the year-over-year gain is expected to slow to 2.9% from 3.0% in September" — a combination suggesting that underlying wage pressures are still moderating gradually despite firmer monthly gains.
Conclusion
The dollar index is trading around 101.75 ahead of the midterm elections, supported by two factors: safe-haven capital flows triggered by the covert U.S. military strike on Iran's Qeshm Island, and election uncertainty itself. Prediction markets show approximately a 74% probability that Democrats will win the Senate, raising the political stakes. On the interest rate front, elevated energy prices sustain inflation concerns, with a December rate hike probability of about 73%; however, Warsh's patient policy tone and concerns about an AI investment slowdown are pushing yields lower, offsetting the safe-haven bid and keeping the dollar index oscillating within its recent trading range. This week's nonfarm payrolls report — expected to show a gain of 65,000, an unemployment rate holding at 4.2%, and average hourly earnings up 0.3% month-over-month — will be the next key variable testing the labor market and the rate hike path. (Dollar index daily chart, source: E-Huitong) As of 14:17 Beijing time, the dollar index was quoted at 101.73/74.
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