Dollar Retreats from Two-Month High Amid Declining Rate Hike Probability

The US dollar has retreated from its two-month high due to a decline in the probability of an October Federal Reserve rate hike. According to data, the probability of a rate hike fell from 72% to 45%. This decline led to a pullback in the greenback's rally over the past three weeks. The area above 101 on the has been a pivot point for over a year, where the corrective rebound in May 2025 halted and growth in June and July stalled.

New York Fed President John Williams signaled that there is no urgency to make further changes to monetary policy following the move in September. While he acknowledged that inflation remains high and another rate hike will likely be required before the end of the year, his comments have caused the market to reassess its outlook. The balance of power could shift back towards the hawks if strong US labor market data is released on Friday.

Other currencies attempted to capitalize on the dollar's retreat, with the yen rising to two-week highs due to verbal interventions by the government and expectations of an overnight rate hike from 1.25% to 1.5%. The euro fell towards 16-month lows, just above 1.1300, after ECB President Christine Lagarde's dovish surprise.

The greenback's retreat has breathed new life into the pound, but its performance is also being affected by the rising likelihood of a fiscal and energy crisis in Britain.