US Dollar Index Rises as Inflation Data and Fed Outlook Drive Demand

The US dollar index continued its rise during trading on Wednesday, remaining close to its highest levels since May, supported by several key economic factors, primarily US inflation data that boosted demand for the dollar.

Factors Influencing the Rise of the Dollar Index

Expectations for US Interest Rate Cuts Affect the Dollar

The dollar managed to gain additional support as expectations for a sharp cut in interest rates by the US Federal Reserve diminished. Market bets increased on a 25 basis point rate cut during the Federal Reserve's next meeting following a series of encouraging economic data, notably the US inflation figures.

In this context, the US Bureau of Labor Statistics released the inflation data for October, showing that the overall inflation rate grew by 2.6%, matching market expectations, while the core inflation rate (which excludes energy and food prices) remained steady at 3.3%, reinforcing expectations that the Fed will proceed with gradual interest rate cuts.

Following the release of this data, expectations for a 25 basis point rate cut during the December meeting rose to 82.3%, while the outlook for keeping rates unchanged fell to 17.7%, significantly supporting the dollar's movements today.

Federal Reserve Officials’ Statements Support Dollar Strength

Additionally, the US dollar benefited from statements by some Federal Reserve officials, who emphasized the need to be cautious before making new decisions regarding monetary policy. Neel Kashkari, a Minneapolis Fed official, noted that recent data confirms the US economy is moving in the right direction in combating inflation, but there is a need to wait before making any monetary policy decisions due to uncertainty regarding the level of the neutral interest rate.

Kashkari added that strong economic performance might indicate that the neutral rate could be higher than previous expectations, further strengthening the dollar in the market.

Impact of These Developments on the Dollar Index

With these positive factors, the US dollar index saw a notable increase of 0.32%, settling at 106.30 points. It appears that the dollar is poised to achieve strong gains for the third consecutive session this week, amid ongoing expectations that the strength of the US currency will be supported by current economic developments.

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