The dollar traded near its highest level in roughly 18 months in European foreign exchange markets on the 12th. Safe-haven dollar buying continued to underpin the currency as investors maintained a cautious stance ahead of escalating Middle East conflict and key U.S. inflation data due later this week.
The Dollar Index, which tracks the greenback against a basket of six major currencies, rose 0.16% to 102.39 — just shy of the 18-month high set last week. The index climbed approximately 2% in September, advancing from around 98.8 at the start of the month into the 102 range. It has now surpassed the peak near 101.6 reached in July, putting the dollar’s relative strength back in the market spotlight.
According to weekly data from U.S. market regulators, investors have been adding to net long dollar positions, which reached approximately $36 billion (about ¥5.7 trillion) in the week through October 7. That marks a sharp increase from $8.4 billion (about ¥1.3 trillion) three weeks earlier, with the euro serving as the primary funding currency for these positions.
Joel Kruger, market strategist at LMAX Group, noted that while markets entered the week in a relatively upbeat mood, renewed geopolitical uncertainty and higher oil prices subsequently pressured risk appetite and deteriorated sentiment. He indicated this has been driving fresh demand for the U.S. dollar.
The U.S. Consumer Price Index (CPI), due for release on the 14th, is one of the last major economic indicators before this month’s Federal Reserve policy meeting. It is likely to serve as a critical catalyst for the dollar’s short-term direction. The Producer Price Index (PPI) and retail sales figures follow on the 15th.
Markets are closely watching economic data to gauge the likelihood of additional rate hikes. According to CME FedWatch, market-implied odds of the Fed holding rates steady this month stand at roughly 81–83%, up sharply from 51% a month ago. The probability of a rate hike, which stood at 42.5% a month earlier, has receded considerably.
The Fed raised its policy rate to 3.75–4.00% on September 16 — its first hike since July 2023 — but investors have since scaled back expectations for additional tightening.
The University of Michigan’s preliminary October Consumer Sentiment Index came in at 46.3, down from 48.1 in September and the lowest level in five months. The conflict in the Middle East has pushed up living costs, intensifying household concerns about the economic outlook.
Barclays analysts see the possibility that the dollar’s upward momentum may slow and enter a near-term consolidation phase. They noted that rising volatility in global bond markets is tightening borrowing conditions across countries, and suggested the Fed could deliver a more dovish message ahead of its meeting on the 28th — particularly if inflation data comes in below market expectations.
The euro fell 0.19% to $1.1180. Investor concerns over France’s fiscal health ahead of the 2027 presidential election weighed on the common currency, which declined for five consecutive weeks through last week.
Dollar/yen edged higher to 158.57 yen, with trading thin as Japan observed a public holiday. The British pound was little changed at $1.323.
Technical analysis presents a divided outlook for the Dollar Index. Macro strategist Geert van Lagen points out that the current rally has reached a long-term trendline that broke to the downside last year, suggesting a potential retest to the downside. If the weekly close confirms at this level, a sharp dollar reversal could be in play, according to this view.
Meanwhile, some analysts argue the dollar’s long-term uptrend remains intact. Under this interpretation, the 18-year bull market that began from the record low of 70.698 recorded on March 17, 2008, still has several years of upside remaining.
Bitcoin and the Dollar Index have historically exhibited an inverse correlation, with dollar strength often acting as a headwind for risk-sensitive digital assets like Bitcoin. However, that relationship broke down in September, when the Dollar Index rose about 2% while Bitcoin gained 6.14%.
October has been a challenging month for crypto markets so far, with total market capitalization down 1.4% since the start of the month. Elevated bond yields, surging oil prices, and fund selling are cited as contributing factors. If the Dollar Index reverses lower from its long-term trendline, one source of pressure on Bitcoin could ease. But if the index breaks higher, Bitcoin’s ability to sustain the resilience it showed in September against a strengthening dollar will be put to the test.
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