Dollar Index Hits Three-Day High as Inflation Data Boosts Rate Hike Expectations
The U.S. dollar index has extended its gains for three consecutive sessions, reaching as high as 99.33 on Monday during Asian trading hours.
This surge is largely attributed to the stronger-than-expected U.S. inflation report released last Friday by the Bureau of Labor Statistics, which showed a month-over-month increase in core CPI of 0.3%, exceeding market expectations and pushing the probability of a September rate hike to 87%.
The Federal Reserve's policy committee under Chairman Powell is expected to meet on Thursday, with financial markets pricing in a roughly 25-basis-point rate hike. A dovish communication or hints of a pause might prompt some profit-taking, but if the Fed confirms a hike and signals further tightening, the dollar could extend its rally.
ING Groep notes that this is not a large-scale tightening cycle like in 2022, but rather a postponed cyclical weakening of the U.S. dollar. The bank expects genuine depreciation to be delayed until spring 2027, by which time U.S. inflation is projected to approach 2% and policy rates are likely to return to neutral levels.
Standard Chartered Bank also believes that robust U.S. economic growth, persistent core inflation, and the real yield spread will continue to underpin the dollar in the near term, while corporate-driven capital inflows and geopolitical risks in the Middle East will provide safe-haven support.