Keywords: US Dollar Index, DXY, UUP, Fed hike odds, EUR/USD, gold price

Key Highlights

  • The US Dollar Index traded around 101.20 in Asian hours on September 29, extending gains for a second day after touching 101.11 on September 24.
  • The index is up about 2.7 percent from a September 10 low of 98.45, a move tracked by the Invesco DB US Dollar Index Bullish Fund (NYSEARCA:UUP).
  • EUR/USD slipped below 1.14, near a two-month low, while USD/JPY traded near 157.67 on September 25, keeping yen intervention risk in view.
  • Spot gold fell 3.2 percent to about USD 4,149 an ounce on September 28, its lowest since August 5, as the firmer dollar added pressure.

Rate Differentials Do the Heavy Lifting

The dollar's rebound tracks the repricing of US rates. The Fed raised its target range to 3.75 percent to 4.00 percent on September 16, and CME FedWatch priced 72.5 percent odds of another 25 basis point hike on October 28 as of September 28, with 94.5 percent odds of at least one more by December 9. With both the 10-year yield, near 5.21 percent, and the 30-year, near 5.48 percent, above 5 percent, US Assets offer wider Yield premiums over many peers. That differential is the core driver behind the Invesco DB US Dollar Index Bullish Fund (NYSEARCA:UUP), which investors use to express a view on the greenback against a basket of major currencies. Positioning looks measured: Rabobank noted speculative USD net long positions were largely unchanged. The Fed's September projections showed 12 of 18 officials expecting one more hike this year, with the median 2026 funds rate raised to 4.1 percent from 3.8 percent in June.

Oil Adds a Second Engine

Energy is reinforcing the move. Brent Crude jumped about 4.1 percent to USD 108.59 a barrel on September 28 after President Trump rejected Iran's offer to reopen the Strait of Hormuz, and the index extended gains into September 29 as talks stalled. Higher oil lifts US Inflation risk and hike expectations, while weighing on energy importers such as the euro area and Japan. That helps explain EUR/USD slipping below 1.14 and USD/JPY holding near 157.67. The US dollar accounts for about 88 percent of global foreign exchange turnover, so a rally tightens financial conditions worldwide, a dynamic that matters for holders of the Invesco DB US Dollar Index Bullish Fund (NYSEARCA:UUP) and for any borrower with dollar debt. Hormuz transits rose to 132 in the week of September 21 to 27 from 116 a week earlier, still far below the roughly 130 a day seen before the war began in late February, which helps explain why an oil risk premium persists.

Metals and Multinationals Feel the Squeeze

A firmer dollar has hit precious metals. Spot gold sits about 26 percent below its late January record near USD 5,600, down about 6.5 percent over the past month, a trend visible in the SPDR Gold Shares (NYSEARCA:GLD) theme. Silver dropped about 4.3 percent to roughly USD 61.5 an ounce on September 28, leaving the gold-to-silver ratio near 67.4. State Street Global Advisors still targets USD 5,000 an ounce for gold after global gold ETFs drew USD 17.1 billion of inflows in August. For equities, a stronger currency reduces the value of overseas Earnings for S&P 500 multinationals. The index fell 0.77 percent to 7,683.69 on September 28, while the Russell 2000, with more domestic exposure but heavier debt, closed at 2,817.91. Analysts expect S&P 500 third-quarter earnings growth of 29.1 percent, according to FactSet, leaving currency translation a variable for fourth-quarter guidance.

Where Things Stand

It can, if the Fed delivers and oil stays elevated, but the Margin is thin. A hike on October 28 would validate the rate premium that has lifted the index about 2.7 percent since September 10, while a cooler August PCE report on September 30 or a softer October 2 jobs report could trim that support. For the Invesco DB US Dollar Index Bullish Fund (NYSEARCA:UUP), the 101 area now sits between Fed expectations and Middle East headlines. Yen weakness near 157.67 per dollar also keeps the risk of official intervention in view, a potential source of sudden reversals.