Dollar Index Rally: 102.44 on Fed Minutes, Haven Demand

The U.S. dollar extended its gains in the week ended October 9, with the Dollar Index up 0.27% as markets reacted to hawkish Fed minutes and haven demand. The Dollar Index rally leaves EUR/USD and USD/JPY exposed to Fed, French fiscal and Middle East headlines ahead of U.S. inflation data.

Key Takeaways

Weekly gain: The Dollar Index closed at 102.21 on October 9, up from 101.93 on October 2.
Euro lagged: EUR/USD dropped 0.46%, from 1.1254 to 1.1202, over the week.
Fed hike priced: Expectations of an immediate Fed hike are low, but markets anticipate one in December.

What Happened

The dollar rallied against the euro, pound, yen, Swiss franc and Canadian dollar in the week. It slipped against the Australian dollar and the Swedish krona. The Dollar Index traded between a high of 102.54 on Monday and a low of 101.75 on Tuesday.

GBP/USD edged down 0.06%, from $1.3243 on October 2 to $1.3235 on October 9. AUD/USD rose 0.43%, from 0.6955 to 0.6985. The yen declined 0.30%, with USD/JPY moving from 157.86 to 158.34.

The gains continued on Monday. The Dollar Index touched 102.46 and stood at 102.44, up 0.22% from the Friday close of 102.21. EUR/USD fell a further 0.27% to 1.1172. GBP/USD was at 1.3224 and AUD/USD at 0.6966. USD/JPY rose to 158.66.

Background

Hawkish FOMC minutes showed the Federal Reserve focused on fighting elevated inflation. Renewed hostilities in the Middle East added safe-haven demand for the dollar. A bond market selloff tied to fears over global debt and fiscal positions also supported the currency.

Fiscal concerns in France weighed on the euro. RTTNews cited record-high debt and political challenges to budget cuts. ECB minutes confirmed that the decision to raise rates was driven by a deteriorating inflation outlook. Hawkish Bank of England remarks capped sterling's losses. Comments from the Bank of Japan governor were seen as less hawkish than expected.

Market Impact

EUR/USD: French fiscal concerns weighed on the euro even though ECB minutes tied the rate increase to a worse inflation outlook.
GBP/USD: Hawkish Bank of England remarks limited sterling's weekly decline against the dollar to 0.06%.
USD/JPY: The BoJ governor's comments were seen as less hawkish than expected, which left the yen exposed to the dollar's gains.
AUD/USD: The Australian dollar and the krona were the only two currencies named as gaining on the dollar over the week.

What to Watch Next

U.S. inflation readings: They are due later in the week, and dollar sentiment is tied to the release. The source gave no date or consensus forecast.
December Fed meeting: Markets anticipate a rate hike in December. The source gives the month only.
Middle East developments: Renewed hostilities drove safe-haven demand for the dollar over the past week.

Bottom Line

The dollar's gains rest on three drivers: a Fed focused on inflation, haven demand and bond market stress. The euro is exposed to French fiscal news. U.S. inflation readings, due later in the week, are the release tied to dollar sentiment.

Dollar Index Rally Extends to 102.21 on Fed, Haven Demand