The US dollar edged higher on Wednesday, recovering part of Tuesday’s decline and trading near recent highs.
Safe-haven demand supported the rebound after a renewed escalation in tensions in the Middle East. Geopolitical developments could remain an important driver, as any signs of diplomatic progress could reduce demand for the greenback.
Treasury yields also moved higher across the curve, stabilising after yesterday’s retreat, providing an additional tailwind for the currency.
Softer PCE and payrolls data have reduced the probability of an October rate hike to around 20%, yet a December increase remains priced in, and markets still expect further tightening into mid-2027. Fed commentary has turned less hawkish overall, although Kansas City Fed President Jeff Schmid argued that interest rates may still need to rise, while Dallas Fed President Lorie Logan has called for at least another 50 basis points of tightening.
Weakness in the euro is providing another source of support. Fiscal and political uncertainty in France remains elevated, keeping pressure on the single currency. Political risk in Spain has added to that backdrop.
The dollar is therefore likely to remain supported near recent highs, with today’s Fed minutes release providing the main test. With an October hike largely priced out, a hawkish account stressing persistent inflation could have a larger impact by rebuilding near-term tightening expectations and lifting short-term yields. A more conditional tone could instead put December pricing under pressure, although the minutes predate last week’s softer inflation and labour data. Upcoming remarks from Federal Reserve officials and jobless claims could reinforce either direction.
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