Oil-driven inflation and neutral Fed stance keep United States Dollar Index firm

• Higher oil prices fuel global inflation risks as US Dollar Index advances.
• An 83.9% probability of rates remaining unchanged next week is priced in by markets, according to the FedWatch Tool.
• Ahead of the October policy meeting, Fed Chair Warsh gives no firm guidance and declines to prejudge decisions.

At around 101.80 in Wednesday’s Asian session, the US Dollar Index (DXY) is edging up, extending the previous day’s modest advance. The index tracks the US Dollar (USD) against six major currencies. Higher oil prices are fuelling concerns over global inflation and encouraging demand for safe-haven assets, helping the Greenback retain its recent gains.

Mixed signals over diplomatic contacts between the United States (US) and Iran kept traders cautious as crude prices rose. Negotiations are continuing, but sentiment came under pressure after high-level meetings in Tehran. Pakistan’s army chief, Field Marshal Asim Munir, held discussions with senior Iranian diplomatic and military leaders on bilateral relations and the progress of talks with Washington. According to a diplomat participating in the discussions, efforts to resolve the conflict remain under way, although reports that a final agreement is imminent are premature.

An 83.9% probability of the Federal Reserve (Fed) leaving interest rates unchanged next week is currently priced in by traders, according to the CME FedWatch Tool, alongside a 90% chance of a December rate increase. Financial markets continue to scrutinise the central bank’s policy outlook. Fed Chair Kevin Warsh, however, struck a neutral tone, stressing that he does not "prejudge" interest rate decisions. His remarks provided no firm indication of whether the Fed will raise rates or leave them unchanged at the forthcoming October policy meeting.

Tech sell-off could add to pressure on the USD

Developments in equity markets could have an increasing bearing on currencies, Scotiabank strategists warn. They argue that “a deeper shakeout in tech stocks could become a further headwind for the USD, given the dominance of the AI build-out in the US growth/inflation narrative.” They believe prolonged pressure on the technology sector would risk weakening one of the principal themes underpinning the Dollar. This would reinforce the prevailing backdrop of broad USD weakness as markets reconsider the risk of near-term Fed tightening.