The US Dollar Index (DXY), which measures the performance of the US Dollar (USD) against a basket of six major currencies, hit its highest level in 19 months at 103.30 on Friday. The Greenback is heading for a third consecutive weekly gain, supported by a sharp increase in US Treasury yields and a dramatic reassessment of Federal Reserve (Fed) interest rate expectations.
The rally reflects a fundamental shift in market sentiment. Investors who previously expected a gradual monetary policy adjustment are now preparing for several consecutive rate hikes as inflation proves more persistent than anticipated.
Although Friday’s US Producer Price Index (PPI) figures come in slightly below expectations, they offer limited reassurance about underlying inflation pressures, leaving the US Dollar’s bullish momentum largely supported by the bond market.
The bond market is sending a powerful signal
The recent surge in US Treasury yields has become the central driver of the US Dollar’s appreciation. The benchmark 10-year US Treasury yield has climbed toward 5.14%, reaching a three-week high, while shorter-term yields have experienced an even sharper repricing.
According to ING Strategist Chris Turner, “This week has seen a powerful, macro-driven rally in the dollar. Short-dated US yields are close to 40bp higher since Tuesday morning, when the Federal Reserve’s Christopher Waller mused over the need for a 50bp hike in December.”
This movement is particularly significant because shorter-term Treasury yields are highly sensitive to expectations surrounding monetary policy. As investors anticipate higher interest rates, US government bonds offer increasingly attractive returns, strengthening demand for US Dollar-denominated assets.
The scale of the adjustment suggests that the currency’s appreciation is not simply driven by temporary risk aversion, but by a broader reassessment of the interest rate outlook.
Brown Brothers Harriman (BBH) Strategist Elias Haddad reinforces this interpretation, noting that “USD extends this week’s broad gains to a fresh 19-month high as the sharp upward adjustment to Fed funds rate hike expectations lifts Treasury yields.”
Inflation forces investors to price in three consecutive Fed hikes
The catalyst behind this bond market repricing is the persistence of US inflation. October’s Consumer Price Index (CPI) increased 0.4% MoM, exceeding expectations of 0.3%, while Core CPI rose 0.3%, above the 0.2% forecast. More importantly, underlying inflation has now increased by 0.3% for three consecutive months.
Deutsche Bank analysts highlight that “it was the third consecutive month with core CPI at +0.3%, and if you take those three months together, the annualised pace for core CPI is running at +3.75%.”
These figures have reinforced the increasingly hawkish tone adopted by Fed officials. Fed Governor Christopher Waller has raised the possibility of a 50-basis-point interest rate increase in December, while Dallas Fed President Lorie Logan and Cleveland Fed President Beth Hammack have emphasized the need for further tightening.
According to the CME FedWatch Tool, markets now fully anticipate a December rate hike, assigning an 88.5% chance to a 25-basis-point increase and an 11.5% chance to a larger 50-basis-point move. More importantly, expectations of further tightening have increased dramatically. Traders now see a 65.5% probability of a second consecutive rate hike in January, while the likelihood of a third increase in March has surged to nearly 50%, compared with just 6% a week ago.
This remarkable shift suggests that investors are preparing for a prolonged tightening cycle rather than a single monetary policy adjustment.
TD Securities has also revised its monetary policy outlook, now anticipating “25bp hikes in December, January, and March,” compared with its previous forecast of increases in December and March only.
US producer inflation cools slightly, but price pressures persist
Friday’s October PPI report provides a more mixed picture of inflation. Headline producer prices increased 0.3% MoM, below expectations of 0.4% and sharply lower than September’s revised 1.4% increase. On an annual basis, however, producer inflation accelerated to 6.5%, compared with 6.3% previously, although remaining below the 6.6% forecast. Meanwhile, Core PPI, excluding food and energy, increased 0.3% MoM, matching expectations and slowing from September’s 0.8% rise. Annual core producer inflation remained unchanged at 5%, in line with forecasts.
These figures offer some relief after the stronger-than-expected consumer inflation report, but they do not establish a return toward price stability.
For the US Dollar, the key question is whether easing monthly producer inflation will be sufficient to challenge expectations of further monetary tightening.
Can the US Dollar extend its rally?
The US Dollar Index (DXY) maintains a bullish structure on the daily chart, trading around 103.10 after breaking above the psychological 103.00 resistance level and reaching a fresh 19-month high.
The latest advance confirms the continuation of the recovery that began in January, with the index establishing a series of higher highs and higher lows. DXY also trades comfortably above its 100-day Simple Moving Average (SMA) at 100.81 and its 200-day SMA at 99.91, reinforcing the positive medium-term outlook.
The immediate challenge for buyers is to sustain the breakout above 103.00, which previously limited the index’s upside. A successful consolidation above this level could open the door toward the next resistance at 104.00, followed by the more significant 104.71 level, corresponding to the late March 2025 top.
The daily Relative Strength Index (RSI) stands near 64, indicating strong bullish momentum without entering overbought territory. This suggests that the US Dollar could extend its advance before encountering significant momentum-related exhaustion.
Conversely, a return below 103.00 could signal a temporary loss of momentum and expose the previous resistance level at 102.00, which now represents an important support. A break below this level would weaken the immediate bullish outlook and potentially trigger a deeper correction toward the 100-day SMA near 100.81.
Overall, the technical picture remains favorable for US Dollar buyers, although holding above 103.00 will be crucial to confirming the latest breakout and maintaining the upward trajectory toward 104.00 and 104.71.
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