DXY traded around 101.45 during the Asian session on October 21, after hitting a three-week low in the previous session.
Easing US Treasury yields and oil prices are diminishing the greenback’s appeal. The current decline reflects a reassessment of the timing of Fed rate hikes, while the case for a prolonged USD downtrend remains unclear.
The immediate pressure on DXY stems from fading expectations of a Fed rate hike in October. As markets no longer anticipate an immediate tightening move, the incentive to hold USD also weakens, creating room for profit-taking following the previous rally.
Nevertheless, the Fed taking more time to deliberate is not enough to change the greenback outlook. If inflationary pressures remain persistent, the prospect of further rate increases toward the end of the year will remain in place and support the USD. I therefore lean toward the view that DXY is correcting in response to a shift in the timing of Fed action. A sustained downtrend would require further evidence that the need for monetary tightening is genuinely diminishing.
Another variable worth watching is the appeal of US assets. Capital inflows into the AI sector have supported the USD, but concerns over investment returns and resilience to high interest rates are making this source of support less certain.
If earnings fail to meet expectations, the USD could face simultaneous pressure from slowing capital inflows and lower market expectations for interest rates. In that scenario, its safe-haven status may not be enough to protect the greenback.
On the other hand, unrest in France and concerns over the fiscal outlook continue to weigh on the EUR. This could limit DXY’s downside, as USD weakness depends on how it compares with the recovery potential of its counterparts.
I lean toward the view that DXY will remain under pressure in the near term, with rebounds unlikely to prove sustainable unless US Treasury yields stabilize. However, I do not yet see this as the beginning of a medium-term downtrend. To change that assessment, I would need to see markets lower their interest rate expectations for the remainder of the year, alongside clearer signs of weakening capital inflows into the US. Ahead of the Fed meeting, a key issue shaping DXY’s outlook is whether the Fed is simply waiting for more data or genuinely sees less need for further tightening.
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