Key facts
- The dollar index fell 0.25% to 102.29, retreating from an 18-month high.
- The euro rebounded 0.34% to $1.1193, recovering from a 17-month low.
- The yen strengthened 0.28% to 158.16 against the dollar.
- Traders are pricing in an 80% chance of the Fed standing pat this month.
- Natural gas prices reached €86.30, their highest level since December 2022.
The dollar slipped from 18-month highs on Tuesday as oil prices retreated and investors shifted their focus to the Federal Reserve's interest rate path. Traders are betting that Middle East tensions will remain contained ahead of the US midterm elections.
US President Donald Trump has indicated a desire to avoid escalation in the Middle East and Ukraine, which could impact his prospects in the upcoming elections. He stated last week that the US would not attack Iran before the elections and mentioned an energy ceasefire between Russia and Ukraine.
Oil prices fell on Tuesday, marking their first decline in nearly a week, partly due to the prospect of additional diesel supplies from Russia. Natural gas prices, however, jumped to €86.30, their highest level since December 2022, a key driver of euro zone inflation.
Investors are closely watching Wednesday's September consumer price index (CPI) data for clues on potential Fed tightening. Traders are currently pricing in an 80% chance of the Fed holding rates steady this month, an increase from 51% a month prior. There is also a 75 basis points of tightening priced in by late 2027.
Daragh Maher, senior forex strategist at HSBC, noted that while markets would react to a hawkish surprise, a single CPI release might not be enough to alter the narrative of a pause that Fed officials seem keen to establish. He added that the Fed emphasizes policy decisions are based on the totality of evidence, suggesting a modest inflation surprise could reinforce confidence in a December hike without significantly impacting October's decision or the dollar.
Two Federal Reserve policymakers have argued for more evidence before deciding on further tightening, leading investors to abandon bets on a rate hike this month. The US dollar index, measuring the greenback's strength against six major currencies, slid 0.25% to 102.29, after reaching 102.61 on Monday, its highest point since April 2025.
The euro rebounded 0.34% to $1.1193, recovering from a roughly 17-month low. Despite the rebound, concerns over France's fiscal outlook persist. Thierry Wizman, global forex and rates strategist at Macquarie Group, suggested that limited positive news from the euro area and any further negative developments could prompt the European Central Bank (ECB) to slow or end its rate hikes, potentially leading to further downside for the euro against the dollar.
The yen strengthened 0.28% to 158.16 against the dollar. Bank of Japan data indicated that wholesale prices rose 6.8% year-on-year to September, falling short of the median market forecast of 7.6% but still fueling market concerns about potential interest rate increases.
The Chinese yuan traded near its strongest level in four years, holding steady at 6.6943 yuan in offshore trade. The Australian dollar was little changed at $0.6968 after the Reserve Bank of Australia released minutes from its September meeting, where a unanimous decision was made to raise rates for the fourth time this year. The RBA noted persistent inflation risks, leaving the possibility of a fifth hike open.