On Tuesday (July 28) during the European session, the US dollar index held steady near a one-month high, currently trading around 101.50. The market is weighing two forces: on the one hand, the possibility of a Fed rate hike this week, while not high, still exists, providing support for the dollar; on the other hand, falling oil prices have eased some inflation concerns, limiting further upside for the dollar.

The probability of an interest rate hike has risen from 16% to 36%, indicating a stronger short-term outlook for the US dollar.

While the US suspension of airstrikes against Iran pushed oil prices lower, partially easing inflation concerns, there was no significant buying interest at the front end of the US Treasury yield curve. Pepperstone's head of research noted, "The lack of substantial buying at the front end of the US Treasury yield curve has provided good support for the dollar." Market pricing in a 25 basis point rate hike by the Federal Reserve this week has risen from 16% a week ago to 36.3%, with a September rate hike priced in as high as 81%. ANZ's head of FX research stated, "A surprise rate hike by the Fed would undoubtedly provide support for the dollar, potentially pushing it to new highs, especially against low-interest currencies such as the yen and Swiss franc."

Institutional Views

Scotiabank points out that the dollar's rise in the second quarter has stalled, with recent price action leaning slightly downward. Policy divergence will be a key pillar, with the Federal Reserve shifting towards easing while other major central banks remain tight, potentially weakening dollar support. Scotiabank believes the dollar faces substantial downside risks under current pricing, with a weakening trend expected in the second half of the year and into 2027. TD Securities predicts a moderate strengthening of the dollar in the third quarter due to room for position rebuilding, but limited upside potential. The bank believes the dollar will revert to its traditional safe-haven attributes, with spot trading becoming more range-bound, and projects an overall dollar decline of approximately 2% in the second half of 2026. The Federal Reserve is likely to remain on hold for an extended period; if the market gradually prices in interest rate hikes, the dollar's gains during the second quarter's US trading hours may reverse. Overall, the dollar index is unlikely to see a trend breakout, exhibiting more phased and range-bound characteristics.

Global Central Bank Meeting Week Kicks Off

This week is a busy week for global central bank meetings. Markets widely expect the Bank of England to keep interest rates unchanged on Thursday, but maintain a cautious stance on inflation. The Bank of Japan is expected to keep rates unchanged on Friday, but markets are watching whether it will signal further rate hikes to curb the yen's depreciation—the yen fell to a 40-year low last week. Ebury's head of market strategy said, "With unchanged rates expected, the Bank of Japan needs to send a fairly hawkish signal to demonstrate its credibility in achieving its inflation target and supporting the yen." Previous verbal interventions in the yen have had limited effect, and the market is anticipating more substantial policy signals.

The US dollar is seeking a balance between expectations of interest rate hikes and geopolitical risks.

The US dollar held steady near a one-month high ahead of the FOMC decision, with market pricing in a rate hike this week rising from 16% a week ago to 36%, and the probability of a September rate hike reaching 81%, providing interest rate support for the dollar. While the decline in oil prices eased some inflation concerns, it did not trigger systemic buying of US Treasuries, and the dollar remained firm around 101.50. This week is packed with global central bank meetings—the Federal Reserve, the Bank of England, and the Bank of Japan will all announce their interest rate decisions. Traders need to closely monitor the wording of the FOMC statement, the Bank of England's inflation stance, and whether the Bank of Japan releases hawkish signals—these three will jointly determine the short-term direction of the dollar. Before policy signals become clearer, the dollar is more likely to consolidate near its current highs, awaiting a catalyst. (US Dollar Index Daily Chart, Source: EasyForex) At 16:01 Beijing time on July 28, the US Dollar Index was at 101.54.