Dollar Weakening as Federal Reserve Rate Hike Probability Drops to 35%

The U.S. dollar index (DXY00) declined by -0.17% following weaker-than-expected inflation data for August and Q2, which dampened expectations for an imminent Federal Reserve rate hike. The probability of a Fed rate increase at the October FOMC meeting fell to 35% from 52% on Tuesday, reflecting growing confidence that inflationary pressures may have peaked. Despite this, the dollar remained supported by signs of resilient economic activity, including a revised-up Q2 GDP growth of +2.2% annualized and stronger-than-forecast labor market indicators such as the September ADP employment report (+90,000 jobs versus +75,000 expected) and Chicago PMI (58.8 vs. 51.0 expected). Additionally, a 1% rise in WTI crude oil prices bolstered the dollar by injecting fresh inflationary concerns, potentially prompting further monetary tightening.

Globally, the euro rose against the dollar as EUR/USD gained +0.19%, driven by German September inflation exceeding forecasts (CPI at +0.6% m/m vs. +0.5% expected), which reinforced expectations of sticky price pressures within the eurozone. Meanwhile, USD/JPY slipped -0.27% as the yen strengthened to a 1.5-week high, buoyed by reduced Fed hike odds and speculation of coordinated intervention by Japan and the U.S. to address yen weakness. However, Japanese economic data released today, including a steeper-than-forecast August industrial production decline (-1.7% m/m) and weaker retail sales (-1.2% m/m), capped yen gains. Oil price increases, while beneficial for dollar bulls, weighed on Japan’s energy-importing economy, offsetting some yen support.

Gold futures rose +0.59% to $1,465.50 per ounce, while silver advanced +0.02% to $24.12, as the dollar’s softening and record ETF holdings in gold and silver ETFs amid central bank demand—particularly China’s record-breaking gold reserve additions—provided upward momentum. Yet, rising crude prices, stronger eurozone inflation, and increased Treasury yields introduced headwinds for precious metals, countering some of the bullish factors. Markets now price in a 22% probability of a Bank of Japan rate hike at its October 30 meeting, while ECB rate hike odds stand at 27% ahead of its October 29 policy decision.

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