The US Dollar Index staged a mild pullback in the first trading session of the new week, trading around the 102.00 to 102.20 range during Monday's Asian session after opening at 102.30 and edging lower.

Last week, the dollar index briefly touched 102.55, marking its highest level since April 2025, notching a fourth consecutive weekly gain and bringing its year-to-date advance to 4.03%.

However, Monday's retreat largely reflects short-term pressure from a technical pullback in US Treasury yields from elevated levels, rather than a fundamental reversal of the dollar's bullish trend.

The core catalyst driving Treasury yields lower from their highs stems from a marginal easing of geopolitical tensions. US President Trump announced over the weekend that Russia and Ukraine had agreed to implement an "energy ceasefire," with both sides pledging to stop attacking each other's energy infrastructure.

Previously, Trump also announced an agreement with Russian President Putin under which Russia would supply diesel to global markets in phases — an initial batch of more than 300,000 tons delivered immediately, another 500,000 tons in November, and an additional 1 million tons thereafter. These developments directly eased concerns over tight global energy supply, with WTI crude oil falling about 2% during Monday's Asian session to around $89, while Brent crude also retreated from above $104.

As a result, the 10-year US Treasury yield pulled back from its previous 5.36% — the highest level since 2002 — to around 5.22% to 5.24%.

As one of the core drivers of the dollar's exchange rate, the decline in real US Treasury yields directly compressed the dollar's interest rate advantage, weakened the appeal of holding short positions in non-dollar currencies, and pushed the dollar index back from its yearly high.

Nevertheless, the dollar's downside is also constrained by multiple factors. Federal Reserve policy expectations remain the most solid foundation currently supporting the dollar. The minutes from September's FOMC meeting released last week confirmed that most policymakers believe further rate hikes before year-end may be appropriate.

Although officials were divided on the rationale for hiking — with some policymakers arguing for guarding against broader effects of energy and other price shocks, while more hawkish core officials saw a need to guard against emerging demand-driven inflation — the overall tone was clearly hawkish.

Kansas City Fed President Schmid further emphasized that even if higher long-term yields drag on activity in some sectors of the economy, the Fed still needs to raise policy rates further to bring down inflation. St. Louis Fed President Musalem stated that "more monetary policy tightening" is needed to bring inflation back to the 2% target, noting the US economy is "quite strong" and the job market is "balanced and stable."

The CME FedWatch Tool shows the market assigns about a 17.7% probability to at least a 25-basis-point hike in October, down somewhat from a week ago, but the priced probability of a December hike remains as high as 84.1%, indicating that market expectations for further policy tightening this year remain firm.

The resilience of US economic data also provides fundamental support for the dollar. Analysts at Nordea noted that the latest US ISM services data showed price pressures heating up again, with the "prices index" rising to its highest level since July 2022, while the "employment index" returned to expansion territory.

This combination means that although the US job market has shown some signs of cooling, services demand and inflationary pressures continue to expand, providing ample justification for the Fed to maintain restrictive policy. Although the University of Michigan consumer sentiment index fell to a five-month low of 46.3, the one-year inflation expectation rose to 4.7% and the five-to-ten-year inflation expectation climbed to 3.5%, both reaching five-month highs, further cementing the Fed's policy logic of "keeping rates higher for longer."

Geopolitical risk is also an important force supporting safe-haven demand for the dollar. The Middle East situation has not eased despite the Russia-Ukraine "energy ceasefire." Iran's top security official declared that Washington's response to its proposal to reopen the Strait of Hormuz was "insufficient," while Trump is considering joining Saudi Arabia's military retaliation against the Houthis and resuming strikes on Iran.

It is worth noting that US markets were closed on Monday for the Columbus Day holiday, making Treasury market liquidity thinner than usual and limiting price discovery, which could amplify short-term volatility uncertainty but also means the current pullback magnitude may not carry trend implications.

Brown Brothers Harriman noted in its latest report that persistently elevated energy prices will raise inflation expectations through cost-push channels, thereby reinforcing the pricing of "higher for longer" policy rates and pushing up the benchmark bond yield curve. This transmission chain provides dual support for the dollar: on one hand, the expansion of real rate and interest rate differential advantages attracts carry trade flows back; on the other hand, relatively strong US economic growth, with output gap and job market resilience reducing recession pricing, means overseas investors' demand for US securities assets remains robust, and net capital inflows through the capital account provide sustained structural buying for the dollar.

ING likewise believes the dollar still has solid support, arguing from a fundamental perspective that uncertainty in European geopolitics and politics continues to suppress risk premiums on currencies like the euro, and safe-haven capital flows are likely to continue tilting toward the dollar in the coming months. On the demand side, the US 10-year Treasury auction performed well, with bid-to-cover ratio and indirect bidding volumes both at high levels, indicating that market demand for US Treasury allocation remains intact. ING expects the dollar index to gradually rise and test the 102.85 target level.

However, Goldman Sachs expressed caution in its latest report about further short-term dollar strength. The bank noted that the recent surge in US interest rates may have exceeded what fundamentals can explain, and a meaningful rebound in Treasuries may depend on falling energy prices or weakening economic growth data. Goldman Sachs identified five drivers of the Treasury selloff: still-accommodative financial conditions, spillover from oil-driven European bond selling, strong US data, weak Treasury auctions, and technical portfolio flows.

The bank's assessment is that the move may have overshot, but the catalyst for a rebound may come from outside the bond market — falling energy prices or weakening growth data. This means that with Brent crude holding near $100 per barrel, Middle East supply disruptions persisting, and the Fed having already hiked in September, the conditions for a major Treasury rebound are not yet in place, but marginal adjustment risks are accumulating.

This week, markets will face a dense battery of key data tests. US September PPI and CPI data will be released on Wednesday and Thursday respectively, directly impacting market pricing of the Fed's rate path. If CPI data comes in strong, it could raise December hike expectations and support the dollar index in challenging its yearly high again; if data is weak, it could ease rate hike concerns and push the dollar lower further.

Fed Chairman Warsh is scheduled to speak on Friday at the IMF and World Bank annual meetings in Bangkok, and markets will closely watch his latest assessment of the inflation outlook and policy path.

Standard Chartered's Chief Investment Office, in its fourth-quarter outlook, expects the dollar to remain supported in the short term, with a three-month dollar index target of 100.2 and a 12-month decline to 98. Short-term support comes from the Fed's possible further tightening and US economic resilience, while over the medium to long term, as oil price and tariff effects fade, inflation pressures ease, and the ECB and BOJ continue tightening, the interest rate differential advantage will narrow.

From a technical perspective, on the daily chart, the dollar index's range-bound trading over the past week or so can be defined as a bullish consolidation phase within a strong uptrend. The exchange rate is running steadily above the 200-day simple moving average and the Bollinger Band middle line, the medium-term bullish structure has not been broken, and the previous upward channel remains intact.

The 14-day Relative Strength Index RSI is around 70.67, having touched the edge of overbought territory, indicating strong prior upward momentum but also the possibility of short-term profit-taking and a technical pullback. Although the MACD indicator has issued a bearish signal, it remains above the zero line, with the red bars continuing to narrow and the fast and slow lines showing signs of flattening — upward momentum gradually decaying but not turning negative; the Bollinger Band channel maintains an upward opening, with the upper band at 102.54 forming strong resistance.

The Bollinger Band middle line at approximately 101.24 constitutes important medium-term support. On the upside resistance front, the yearly high of 102.55 is the key pressure level for this upward move, having been tested multiple times without a effective breakout, accumulating substantial take-profit selling; if the index cannot hold above this level, the market will likely shift into high-level range-bound consolidation; a breakout could open the way to challenge the 103.00 round number. ING's more optimistic target is 102.85.

On the downside support front, the 101.70 to 101.80 area is the support level converted from previous resistance after a breakout, and last Friday's technical pullback found support precisely in this area; next is around 101.40, with stronger support at the 101.00 round number.

On the 4-hour chart, the index is engaged in repeated tug-of-war around the 102.00 level, with short-term moving averages maintaining an upward slope and the price continuing to trade above major moving averages, indicating the short-term trend remains bullish. Short-term momentum indicators have turned up again after retreating from highs; if this week's data drives a breakout above 102.55, the uptrend will be confirmed and further upside space opened; conversely, if data is dovish, the index could fall back to test the 101.70 to 101.80 support zone.

The daily chart PP pivot point is at 102.156, corresponding to a maximum support-resistance coverage range of 101.563 to 102.823.

Editor's Summary

The dollar index is currently in a typical transitional phase of "short-term technical pullback" versus "medium-term bullish structure intact." The oil price decline brought by the Russia-Ukraine "energy ceasefire" and the pullback in Treasury yields from highs have created short-term profit-taking pressure on the dollar, but the persistence of the Fed's hawkish stance, the resilience of US economic data, safe-haven support from Middle East geopolitical risks, and the suppression of non-dollar currencies by European fiscal concerns together form a multi-layered defense system for the dollar index.

Looking ahead, the short-term direction will depend on three core variables: whether this week's US CPI/PPI data can change market pricing of the Fed's rate hike pace, the policy signals conveyed by Warsh's speech at the IMF annual meeting, and the further impact of Middle East developments on energy prices and risk sentiment. If strong CPI data combines with rising geopolitical risks, the dollar index could challenge the 102.55 yearly high again and make a push toward 103.00; conversely, if data is weak and oil prices continue to fall, the index could pull back and consolidate toward the 101.70 to 101.40 area.