United States Dollar Index eases from 18-month peak; slips below 102.50

The US Dollar Index (DXY), which tracks the Greenback against a basket of currencies, drifts lower during the Asians session on Tuesday, eroding a part of the previous day's strong gains to a fresh high since April 2025. The index currently trades just below mid-102.00s, down nearly 0.10% for the day. The bullish fundamental backdrop, however, backs the case for the emergence of some dip-buyers at lower levels.

The US Federal Reserve's (Fed) hawkish outlook and concerns about inflation risks stemming from volatile energy prices remain supportive of elevated US bond yields. In fact, the September FOMC meeting Minutes confirmed last Wednesday that policymakers still view inflation as the dominant threat to macroeconomic stability and back the case for further policy tightening. This reinforced market expectations that the US central bank will raise borrowing costs by the end of this year, which might continue to act as a tailwind for the DXY.

Hammack leans hawkish as Fed rhetoric flags risk of entrenched inflation mindset

Fed’s Hammack delivered a notably more hawkish tone, with the 8.4/10 FXS Speechtracker score standing well above the 7.5/10 historical average, underscoring a stronger-than-usual push for tighter policy. The emphasis on the need for higher interest rates, a restrictive stance to achieve 2% inflation, and concern over an emerging inflationary mindset—reinforced by firms planning price hikes beyond cost pressures—signals a preference for swift, smaller rate moves to lean against broad-based, demand-driven price pressures, including those linked to AI. Hammack’s characterization of financial conditions as neutral, alongside sustained growth and a steady job market, supports the case for further tightening rather than early easing.

The FXS Fed Sentiment Index rose by 0.59 points to 138.92, firmly in hawkish territory and consistent with the elevated FXS Speechtracker score. This move higher reflects a clear shift toward tighter policy rhetoric, reinforcing expectations that the Fed will prioritize re-anchoring inflation expectations over supporting growth in the near term.

Meanwhile, the Iran-backed Houthi group in Yemen escalated its campaign against Saudi Arabia and fired more missiles on Monday. This follows deadly strikes on Riyadh’s King Khalid International Airport over the weekend, which drew a Saudi vow of retaliation. Moreover, US President Donald Trump raised the possibility of joining strikes on the Houthi group and resuming attacks on Iran. This keeps the geopolitical risk premium in play and should help limit the downside for the safe-haven Greenback, warranting caution for DXY bears.

Traders might also refrain from placing aggressive directional bets and opt to move to the sidelines ahead of the release of the latest US inflation figures – Consumer Price Index (CPI) and Producer Price Index (PPI) on Wednesday and Thursday, respectively. Apart from this, Fed Chair Kevin Warsh's speech at the annual meetings of the IMF and World Bank in Bangkok on Friday will be looked upon for more cues about the future policy path. The outlook, in turn, will drive USD demand and provide some meaningful impetus to the DXY.