Dollar Snaps Four-Week Winning Streak as Fed Rate Bets Cool

The U.S. dollar snapped a four-week winning streak, pressured by a rally in the Treasury market and comments from a former Federal Reserve official that tempered expectations for another interest rate hike. The pullback occurred despite government reports showing inflation remained significantly above the central bank's target.

Dollar Weakens Despite Hot Inflation

The U.S. Dollar Index (DXY), which measures the greenback against six major peers, ended the week down 0.4%, slipping to 101.79 on Friday, according to Investing.com data. The decline came even as new data pointed to persistent price pressures.

September's Consumer Price Index (CPI) showed a headline annual advance of 3.7%, while the Producer Price Index (PPI) surged 6.3% year-over-year, its largest increase since December 2022. While such figures would typically bolster the case for a stronger dollar via higher interest rates, markets instead focused on the Federal Reserve's potential policy response.

Rate Hike Odds Recede

Market sentiment shifted following remarks from former Federal Reserve Governor Kevin Warsh at an IMF and World Bank forum. While Warsh acknowledged persistent inflation, his comments were interpreted by traders as lacking a strong hawkish signal for an imminent rate hike.

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"The lack of a 'hawkish' tone... was to taken to mean that there won’t be a Fed rate hike in late October," said Thierry Wizman, global FX and rates strategist at Macquarie, in a note cited by the source. Following the remarks, the probability of a quarter-point rate hike this month fell to around 17% from nearly 28% a day earlier, according to the CME FedWatch Tool. A concurrent rally in U.S. bonds, which pushed Treasury yields lower, also weighed on the dollar's appeal.

Moves in Global Currencies

The dollar's retreat provided relief for other major currencies. The euro posted its first weekly gain in six weeks, bouncing from a 17-month low. In Asia, the performance was mixed:

• The Indian rupee notched its best weekly performance since early April, supported by what the source described as aggressive intervention from the Reserve Bank of India to curb speculation.
• The Indonesian rupiah slumped after global index provider MSCI proposed downgrading Indonesia from "Emerging Market" to "Standalone Market" status. The news triggered an 11% plunge in the Jakarta Composite Index, as a formal downgrade would force index-tracking funds to liquidate their Indonesian holdings.