US dollar steady as markets assess Fed path and geopolitical risks

The US dollar was steady on Friday, holding near recent highs as gains against the yen offset modest weakness against the euro, while Treasury yields stabilised following Thursday’s decline.

Federal Reserve rhetoric has become more cautious since last week’s softer-than-expected PCE inflation and labour-market data, although policymakers have not abandoned the broader tightening bias.

Governor Christopher Waller said further interest rate increases will probably be needed to bring inflation back towards 2%, while stressing that policymakers can remain flexible over the timing and that hikes do not need to happen at consecutive meetings.

Other Fed officials have continued to argue for tighter policy, keeping a December move firmly in play. That distinction is reflected in market pricing, with the probability of an interest rate hike this month having fallen to around 17%, while the likelihood of at least one increase by year-end remains high.

At the long end, fiscal concerns continue to provide support to yields. The Congressional Budget Office reported that the federal deficit widened by 12% to nearly USD 2 trillion in the latest fiscal year. Persistent borrowing needs and rising debt-servicing costs could therefore keep longer-dated yields elevated even if expectations for an immediate Federal Reserve move remain subdued.

Geopolitics adds another source of uncertainty. Easing tensions in the Middle East have pulled oil prices lower on Friday, although crude remains elevated as traders await further developments. Continued progress could reduce safe-haven demand and ease inflation concerns. Renewed escalation would work in the opposite direction.

Looking ahead, the dollar could remain range-bound, with upcoming economic data providing the next catalysts. With an October hike only marginally priced, strong readings could influence tightening expectations and support the dollar. Next week’s inflation data may trigger a broader repricing of the Fed’s policy path and set the direction for both Treasury yields and the dollar.