Is the United States Dollar Index extending its rally on stronger prospects of a 50 bps Fed rate hike?

The US Dollar Index surges towards 102.52 as expectations of a Fed 50 bps rate increase in December gain momentum.
Ahead of the US CPI release, the Fed’s Waller said higher or unchanged core readings could fuel concerns about a 50 bps interest rate hike.
At 0.3% MoM in October, US core CPI growth exceeded the 0.2% estimate.

Gains against its major currency peers put the US Dollar (USD) ahead on Wednesday, with financial markets beginning to price in a larger interest rate increase by the Federal Reserve (Fed) at its December policy meeting.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Trading near 102.52 at the time of writing, the US Dollar Index (DXY) is up 0.3%, reaching its highest level in almost four weeks. The index measures the Greenback’s value against six major currencies.

How Is the US Dollar Performing Today?

The US Dollar recorded its strongest performance against the Swiss Franc today. Its percentage changes against the major currencies listed are shown in the table below.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		0.27%	0.25%	0.19%	0.26%	-0.05%	0.20%	0.51%
EUR	-0.27%		-0.02%	-0.09%	-0.03%	-0.33%	-0.06%	0.24%
GBP	-0.25%	0.02%		-0.06%	0.00%	-0.31%	-0.06%	0.26%
JPY	-0.19%	0.09%	0.06%		0.06%	-0.24%	0.00%	0.32%
CAD	-0.26%	0.03%	-0.00%	-0.06%		-0.30%	-0.06%	0.26%
AUD	0.05%	0.33%	0.31%	0.24%	0.30%		0.26%	0.56%
NZD	-0.20%	0.06%	0.06%	-0.00%	0.06%	-0.26%		0.32%
CHF	-0.51%	-0.24%	-0.26%	-0.32%	-0.26%	-0.56%	-0.32%

Percentage movements between the major currencies are displayed in the heat map. Select the base currency in the left-hand column and the quote currency in the top row. Selecting the US Dollar on the left and following its row across to the Japanese Yen, for instance, gives the percentage change for USD (base)/JPY (quote) in the corresponding cell.

Why are markets pricing in a jumbo Fed rate hike?

The reassessment in markets has been “to consider the prospect of a 50bp hike,” according to analysts at MUFG. They emphasise that this is “only now being considered because of Waller’s comments prior to the CPI report rather than the CPI report itself.” In their view, “Waller’s comment that a stronger CPI print may warrant a 50bp hike has sparked a debate over whether Waller had knowledge of the CPI print,” contributing to a rise in short-end yields and a repricing of Fed expectations.

Waller’s argument that “the sticky inflation and energy risks warrant the reversal of the 75bps of cuts and hence why wait two meetings to do that” has been followed by a shift in pricing. As MUFG puts it, “the OIS market is now partially pricing the risk of a 50bp hike on 9th December,” reflecting that change.

A larger increase should not yet be treated as the base case, however, the bank cautions. Its analysts write: “We remain sceptical of the need to hike by 50bps at this stage and suspect the majority will see the better risk-reward in going by 25bps,” noting that “we still have another payrolls report (but no further CPI prints, although it’s the day after) before the FOMC meeting.” The possibility of markets moving further towards a 50bp outcome remains, with MUFG adding that “a strong print plus a rebound in crude oil after the recent sharp drop would be one scenario of a possible more aggressive hike,” in its assessment.

Tuesday’s Consumer Price Index (CPI) release put October’s headline inflation increase at 0.4% Month-on-Month (MoM), above the 0.3% estimate. Core CPI, which strips out volatile food and energy items, rose 0.3% over the same period, exceeding expectations of 0.2%.

Can the US Dollar Index Extend Its Gains? Technical Analysis

A Bullish Flag breakout and sustained trading above the 20-day Exponential Moving Average (EMA) at 101.91 support the bullish bias on the daily chart, where US Dollar Index Spot stands at 102.52.

At around 59, the Relative Strength Index (RSI) points to a moderately positive outlook rather than overbought conditions.

The descending trend barrier near 102.94 marks the key resistance on the upside. A daily close beyond it would reinforce the bullish outlook and create scope for a stronger continuation of the recent rally. On a pullback, the 102.50 region offers immediate support, while the EMA 20 at 101.91 provides further backing for underlying demand.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

US Dollar: Frequently Asked Questions

What role does the US Dollar play?

As the official currency of the United States of America, the US Dollar (USD) also serves as the ‘de facto’ currency in a significant number of other countries, circulating alongside their local banknotes. No currency is traded more widely: according to 2022 data, it accounts for over 88% of global foreign exchange turnover, equivalent to average daily transactions of $6.6 trillion. The USD replaced the British Pound as the world’s reserve currency after the Second World War. Gold backed the US Dollar for most of its history, until the Bretton Woods Agreement in 1971 brought the Gold Standard to an end.

Why do Federal Reserve decisions affect the US Dollar?

Monetary policy set by the Federal Reserve (Fed) is the single biggest influence on the US Dollar’s value. To fulfil its dual mandate of maintaining price stability (controlling inflation) and promoting full employment, the Fed primarily adjusts interest rates. Inflation above the Fed’s 2% target, with prices climbing too rapidly, prompts rate increases that support the USD. Conversely, inflation below 2% or an excessively high Unemployment Rate may lead the Fed to cut interest rates, putting pressure on the Greenback.

How does Quantitative Easing work, and what does it mean for the US Dollar?

When conditions become extreme, the Federal Reserve can print additional Dollars and introduce quantitative easing (QE), substantially expanding the flow of credit through a stalled financial system. This unconventional policy is used when credit dries up as banks stop lending to one another for fear of counterparty default. It serves as a last resort if interest rate cuts alone are unlikely to deliver the required outcome. During the Great Financial Crisis in 2008, QE was the Fed’s preferred response to the credit crunch. Under this approach, the Fed prints more Dollars to purchase US government bonds, mainly from financial institutions. The US Dollar typically weakens as a result of QE.

How does Quantitative Tightening work, and what does it mean for the US Dollar?

The opposite process, quantitative tightening (QT), generally supports the US Dollar. It involves the Federal Reserve halting bond purchases from financial institutions and allowing its existing bonds to mature without reinvesting the principal in new purchases.