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The dollar index retreated slightly on Monday but remained near its multi-month high as investors closely monitored global developments ahead of the Fed’s interest rate decision.
The dominant force in play remains the Middle East conflict, which has kept oil prices elevated and inflation expectations firm.
Reports that Washington is assembling a coalition to escort vessels through the Strait of Hormuz could offer some relief for the oil market and could weigh on the dollar.
Yet the underlying support for the dollar persists, as higher energy costs feed directly into inflation expectations and push back the timeline for Federal Reserve interest rate cuts. As the FOMC meeting this week draws closer, markets are focused on Chair Powell’s remarks regarding inflation as well as the Federal Reserve’s economic projections.
Last week’s data also fuelled caution. Core PCE inflation remained sticky in January, GDP growth was lower, and job openings rebounded. A hawkish stance from the Fed would likely extend dollar strength and lift yields further, while any softening could quickly place selling pressure on the dollar and erode the recent gains.
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