The US dollar index traded in a narrow range during Asian trading hours on Thursday (September 10), currently hovering around 98.75, virtually unchanged on the day after declining for three consecutive trading days. Market participants are closely watching the upcoming US Producer Price Index (PPI) release on Thursday and the Consumer Price Index (CPI) release on Friday, both inflation reports providing key clues about the outlook for monetary policy ahead of the Federal Reserve's policy meeting next week.

Over 60% of bets are on interest rate hikes, but institutional surveys indicate a "wait-and-see" approach.

Recent strong US jobs data has spurred traders to increase their bets on interest rate hikes. The CME FedWatch Tool shows the market has priced in a greater than 60% probability of a rate hike at the Fed's next policy meeting. However, a survey of economists indicates that most respondents expect the Fed to keep rates unchanged at its September 15-16 meeting and remain on hold for the remainder of the year—a stark contrast to market expectations of a rate hike. Recent economic data has been generally strong, and several economists point out that the August CPI data will be crucial in solidifying their assessment of the future interest rate path. This divergence between market pricing and institutional expectations means that the inflation data could trigger a sharp repricing of the US dollar index.

Capital outflows from the bond market intensified, and high yields weakened demand.

Investment firms' observations suggest that investor risk appetite is cooling. Their fund flow indicators show that "investors are reducing their exposure to core sovereign bonds more aggressively than they are reducing their exposure to global equities." The firm adds that "rising global yields are increasingly putting pressure on bond flows," highlighting that upward pressure on interest rates is prompting a more pronounced withdrawal of funds from core sovereign debt rather than from equities. This shift in fund flows reflects a transmission effect across asset classes as the market reprices the interest rate outlook.

Institutional Views

While cross-asset fund flows reveal short-term pressures, institutional assessments of the dollar's medium-term trajectory are equally noteworthy. Mitsubishi UFJ Financial Group (MUFG), in its September 2026 foreign exchange monthly report, outlines a specific path: based on a spot exchange rate of approximately 99.57 on August 28th, the DXY is projected to rise to 100.19 by the end of Q3 2026, fall back to 98.07 in Q4, and then further decline to 96.53 in Q1 2027 and 96.20 in Q2 2027. The recent slight strengthening reflects the relative growth advantage of the US and policy uncertainty, but the medium-term trend is weak, mainly influenced by global growth rebalancing, policy divergence among other major central banks, and dollar valuation pressures. The report also provides corresponding exchange rate forecasts, such as EUR/USD rising to 1.18 in Q4 and further increasing in 2027, indicating overall pressure on the dollar against major currencies. MUFG believes that the dollar index will struggle to sustain a break above 100, gradually giving back some gains before the end of the year, with further downside potential opening up after 2027.

Summarize

The CME FedWatch Tool shows a greater than 60% probability of a rate hike, but most economists expect the Fed to keep rates unchanged at its September meeting and for the remainder of the year, resulting in a significant divergence between market pricing and institutional expectations. Thursday's PPI and Friday's CPI data will be key to breaking this divergence—stronger-than-expected inflation data will reinforce bets on a rate hike and support the dollar; moderate data could push the dollar further down. Meanwhile, rising global yields are putting pressure on bond flows, with investors cutting back on core sovereign bonds more than equities, reflecting a shift in risk appetite across asset classes. (US Dollar Index Daily Chart, Source: EasyForex) At 14:02 Beijing time, the US Dollar Index was at 98.73.