The week that was
The US Dollar spent the week on the back foot, pulling back from last week’s highs and dragging the US Dollar Index (DXY) down toward the 97.50 area, still moving within the broader consolidation that’s been in place since early August.
Pressure on the Greenback was already building as traders priced in additional Federal Reserve (Fed) rate cuts, and the US federal government shutdown only added to the uncertainty, souring sentiment around the buck.
Looking at the bond market, Treasury yields slipped through most of the week, though they managed to regain some composure toward the end of the week.
The Fed’s risk management
The Fed shaved rates by a quarter point at its gathering on September 17, pointing to slower hiring and rising risks for the job market, even as inflation remains “somewhat elevated”.
Policymakers’ projections still show another half-point of easing likely before year-end, with smaller steps pencilled in further out into 2026 and 2027. For next year, the median rate forecast dipped to 3.6%, growth was nudged a bit higher to 1.6%, while unemployment and inflation forecasts stayed put at 4.5% and roughly on target.
The vote wasn’t unanimous. New governor Stephen Miran pushed for a larger half-point cut, highlighting divisions over how quickly the Fed should act.
At his subsequent press conference, Chair Jerome Powell struck a careful, measured tone. He noted that hiring is losing momentum, consumer spending is softening, and inflation is running at 2.7% on headline PCE and 2.9% on core. Tariffs are adding pressure to goods prices, he said, but services inflation is steadily easing. Powell stressed that risks now look more balanced, the Fed is nearing neutral, and there’s little appetite for bolder moves.
Markets are taking this as a signal for two more cuts, one in October and another in December. On this, futures are pricing about 45 basis points of easing by year-end and just over a full point by the end of 2026.
Fed officials maintain their cautious approach
Fed officials struck a cautious but varied tone this week as they weighed the balance between inflation risks and a softening labour market.
New York Fed President John Williams said signs of weakness in jobs data underpinned his support for the latest rate cut, though he stressed the Fed still had unfinished business in bringing inflation down to 2% without causing undue harm to employment. St. Louis Fed’s Alberto Musalem also left the door open to further easing but warned rates must remain high enough to lean against inflation that is still running above target.
Vice Chair Philip Jefferson said he expects growth to slow to around 1.5% for the rest of the year, with the labour market showing signs of strain. He backed the September cut as a way to balance elevated inflation with mounting risks to jobs. Boston Fed’s Susan Collins echoed that view, saying she supported the move and remained open to more cuts, while still favouring a modestly restrictive stance until price stability is more firmly restored.
Others were more hawkish. Dallas Fed President Lorie Logan argued that inflation pressures remain persistent and even accelerate when tariffs are excluded. She said the Fed’s insurance cut last month was appropriate but cautioned against moving too quickly with further easing given resilient consumption and buoyant asset prices. The Chicago Fed’s Austan Goolsbee voiced similar concerns, noting that inflation has been above target for four years and is edging higher. He also flagged that the government shutdown will delay key economic data, complicating the Fed’s job.
Finally, Governor Stephen Miran stood out with a call for a more aggressive path of rate cuts. He argued that structural shifts in the economy, particularly from immigration, have lowered the neutral rate, making policy more restrictive than intended. Still, he suggested the gap between his outlook and that of his colleagues may be narrower than it appears.
No exit in sight as shutdown drags on
The US government shutdown entered its third day on Friday, and Washington still looks nowhere close to a deal. Republicans and Democrats are pointing fingers over who’s to blame, while federal workers and contractors are stuck in limbo, and investors are left worrying about what the standoff could mean for the economy.
The White House has turned up the heat, announcing plans to pause or cancel billions in projects in Democratic-leaning states, while also signalling that thousands of federal workers could face layoffs. Press Secretary Karoline Leavitt said job cuts are “likely going to be in the thousands.”
On Capitol Hill, the Senate remains split over a House-passed measure to keep the government funded for another seven weeks. Democrats want the package to include extended health care tax credits and curbs on the president’s ability to claw back funds already approved by Congress, conditions Republicans have so far rejected.
If the standoff drags on, the shutdown could delay key economic data releases, disrupt federal services, and weigh on confidence at a time when growth is already slowing.
Tariffs: Still the joker in the global pack
There has been radio silence from the trade front.
So far, Washington and Beijing have agreed to extend their truce for another 90 days, according to the latest discussions. President Trump held off on a planned tariff hike until November 10, and China, for now, chose not to retaliate. Even so, tariffs are still biting: US imports from China face a 30% duty, while American exports going the other way carry a 10% tax.
Across the Atlantic, the US struck a fresh deal with Brussels. Europe agreed to cut tariffs on American industrial goods and open up more space for US farm and seafood products. In return, Washington slapped a 15% duty on most European imports. The sticking point is cars, with EU rules still unclear, auto tariffs could easily become the next flashpoint.
Trump also rolled out a new wave of industry-focused tariffs. Starting October 1, branded and patented drug imports will face a 100% levy unless the manufacturer is building a US plant. Heavy-duty trucks will carry a 25% import tax, while kitchen and bathroom cabinets are set for a 50% tariff. The message is clear: invest in America or face the consequences.
However, when we take a step back, tariffs continue to pose a significant challenge. They might deliver short-term political wins, but the longer they linger, the more they risk pushing up household costs and weighing on growth. Some in Trump’s circle don’t mind a softer Dollar to give exporters an edge, but reshoring manufacturing is a long, expensive project, and tariffs alone won’t get it done.
What’s Next for the US Dollar?
The FOMC Minutes from the September 16–17 meeting will be the focus of attention next week, and the ongoing government shutdown is likely to continue dominating sentiment. The preliminary University of Michigan Consumer Sentiment survey will also be on the radar.
On top of that, remarks from Fed officials, including Chair Powell, should give markets fresh clues on the policy outlook.
Technical landscape
Further consolidation appears to be the name of the game for the US Dollar.
If the DXY breaches below its 2025 bottom at 96.21 (September 17), it could then pave the way for a potential move to the February 2022 floor of 95.13 (February 4), ahead of the 2022 valley at 94.62 (January 14).
On the flip side, if bulls regain the upper hand, a test of the August high at 100.26 (August 1) could re-emerge on the horizon. Further north comes the weekly high at 100.54 (May 29) and the May ceiling at 101.97 (May 12).
For now, the DXY keeps trading below both the 200-day SMA (101.47) and the 200-week SMA (103.23), keeping the broader bearish bias intact.
Momentum indicators lean inconclusive: the Relative Strength Index (RSI) eases to around 49, showing incipient bearish sentiment, while the Average Directional Index (ADX) near 10 signals a pale market trend.
US Dollar Index (DXY) daily chart
Bottom line
The near-term outlook for the US Dollar remains murky. Political pressure on the Fed has eased a bit, but expectations of more rate cuts, ongoing tariff risks, swelling government debt, and uncertainty around the shutdown are all putting sentiment under pressure. Even when the Greenback manages a bounce, those gains have been tough to hang on to.
Most strategists still see the bias as bearish, though with positioning already crowded on the short side, much of the downside story may be in the price. That means the next leg lower could play out more slowly and unevenly, rather than in a straight slide.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
