United States Dollar Index (DXY) eases from 101.13 highs but remains near yearly highs

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US Dollar Index (DXY) eases to 100.75 after hitting one-year highs at 101.13.
The Index is on track for a 1% weekly appreciation, boosted by rising Fed tightening hopes.
Markets are pricing a 77% chance of a rate hike in October, up from 37% a week ago.

The US Dollar Index (DXY), which measures the value of the Greenback against a basket of peers, has lost steam during Friday’s European session, with markets at half throttle amid the Juneteenth bank holiday in the US and investors pondering the soundness of the US-Iran peace deal. The Index retreated from one-year highs above 101.00, although it remains steady above 100.75 so far, and is on track for a 1% weekly rally.

Looking from a wider perspective, the pair keeps the broader bullish trend intact, buoyed by rising bets that the Federal Reserve (Fed) will hike rates at least once this year. The hawkishly leaning monetary policy stance released after June’s meeting and Kevin Warsh’s commitment to bring inflation to the 2% level have cleared doubts about the bank’s new chairman’s suspected dovishness and restored confidence in the bank's independence.

The Fed also published a shorter monetary policy statement, removing any mention of the easing bias and highlighting the improvement in economic activity and the stronger labour market. Beyond that, the interest rate projections, which did not include Warsh’s take, showed that nearly half of the board members expect at least one rate hike in 2026.

Futures markets have ramped up bets on monetary tightening after the Fed’s meeting. Chances of at least one rate hike before October have risen to 77% from around 40% one week before, and the odds for a rate hike before the end of the year are now at 90% from 55% in the previous week, according to data by the CME Group’s Fed Watch Tool.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.