United States Dollar Index approaches 102.00 with traders awaiting central bank decisions

• A packed schedule of major central bank policy decisions awaits traders this week as the US Dollar Index posts a modest gain.
• Following last week's fall, US Treasury yields are stabilising, lending the Greenback some support.
• Wednesday's Fed announcement is in focus for signals on a potential December rate rise, while traders also look ahead to US PCE inflation.

At around 101.98, the US Dollar Index (DXY) is up 0.24% on Monday at the time of writing. The index, which measures the US Dollar against a basket of six major currencies, is gaining modestly as traders adjust positions before a crowded calendar of central bank decisions in major economies. Those announcements could prompt sharp market fluctuations.

A steadier US Treasury market is also helping to support the Greenback after yields fell last week. Concerns surrounding AI-related investments encouraged buying of government bonds, putting downward pressure on yields across the curve. Monday's picture is mixed: yields on shorter-dated debt are edging up, whereas those on longer-dated bonds are broadly unchanged close to recent lows. The benchmark 10-year US Treasury yield is around 4.98%.

Dollar outlook tilts upwards as Fed stays on course amid diverging G10 policies

This week's crowded central bank schedule is highlighted by analysts at MUFG/BTMU, who observe that “five G10 central banks meet this week with the RBNZ, BoC and Federal Reserve all meeting on Wednesday, followed by the ECB on Thursday and the BoJ on Friday.” Their forecast is that “we expect the RBNZ and the BoC to hike by 25bps while the Fed, ECB and the BoJ to remain on hold.”

Turning to the outlook beyond this week, MUFG/BTMU observe that “the final FOMC meeting of the year is not until 9th December and the signs of tightening financial conditions continue to build so there is certainly a chance that Fed rate hike expectations for December could ease.” In that context, they emphasise that “the willingness of Warsh to signal the Fed remains on the path highlighted by the dots will be important.” Their assessment is that “in circumstances of tightening financial conditions and bond market volatility in Europe we would assume the Dollar will remain underpinned, and the risks remain skewed to the upside.”

Inflation risks stemming from energy prices and tensions in the Middle East continue to steer central banks towards a hawkish stance. In September, the Federal Reserve (Fed) increased interest rates by 25 basis points (bps), taking them to 3.75%-4.00%. The revised dot plot put the median rate forecast at 4.1% for both end-2026 and end-2027, indicating a further quarter-point increase this year. Against this background, the CME FedWatch Tool shows traders assigning around a 79% probability to another rate rise in December.

Changes in financial conditions nevertheless make the policy outlook less straightforward. Borrowing costs remain high enough to constrain households and businesses, despite Treasury yields having come down from recent peaks. Growth is still resilient. However, worries about AI valuations and substantial investment spending increase the risk of additional equity-market declines, potentially giving the Fed grounds for caution.

An unchanged rate decision is widely anticipated from the US central bank on Wednesday, leaving traders to scrutinise the accompanying statement and Chair Kevin Warsh's press conference. Whether markets continue to expect a further increase before the end of the year could hinge on his interpretation of inflation and financial conditions.

After Wednesday's announcement, attention will turn to Thursday's US Personal Consumption Expenditures (PCE) inflation release and the advance estimate of third-quarter Gross Domestic Product (GDP). Together, they will offer a further test of expectations for a December rate rise.