Dollar advances as markets await key central bank decisions

Dollar advances ahead of key Fed decision

The US dollar gained against all but one of the other major currencies on Monday, losing some ground only against the Canadian dollar, perhaps as the Bank of Canada is one of the two major central banks that is expected to raise interest rates this week. The greenback remained on the front foot today, underperforming only against the kiwi. The RBNZ is the other central bank that is expected to hike tomorrow, during the Asian session.

Dollar traders are slowly shifting their attention to the FOMC gathering that starts today, with the decision scheduled to be announced tomorrow. The Committee is largely expected to remain sidelined tomorrow, with Fed funds futures pointing to only a 10% chance of a rate hike.

That said, this doesn’t make the meeting unimportant as investors are assigning a strong 90% chance of a December rate increase, while around 70bps worth of rate hikes are baked into the cake by the end of 2027. Therefore, with inflation further accelerating in September, investors will scrutinize the statement and Warsh’s press conference for clues about whether a December hike is firmly on the table and whether officials remain willing to continue raising interest rates in 2027. No economic projections or dot plot will be published at this meeting.

A hawkish hold, especially if accompanied with members dissenting the hold decision and favoring a hike, could reinforce the December-hike case and thereby add more fuel to the dollar’s engines. The opposite may be true if the message is more neutral, emphasizing patience in future actions.

French debt concerns weigh on the euro; ECB awaited

The euro slid yesterday, even after Moody’s kept France’s credit rating at Aa3, avoiding a downgrade. The French-German yield spread pulled back but it remains elevated by historical standards amid the ongoing debt crisis in France.

Although the data after the latest ECB gathering was supportive of further rate hikes, the French crisis prompted investors to price out a hike at this week’s gathering. This leaves the European Central Bank (ECB) standing between a rock and a hard place. On the one hand, it needs to continue raising interest rates to fight stubbornly sticky inflation, but on the other hand, aggressive tightening may result in weaker growth and prompt investors to demand even higher yields for financing France’s debt.

So, having all that in mind, although the ECB is expected to stand pat, euro traders will surely want to figure out whether Lagarde and Co. remain willing to continue raising rates whenever data warrant so, or whether they will slow down the pace amid the turbulence in France.

Wall Street rebounds, oil hostage to geopolitics, gold flirts with $4,000

On Wall Street, all three of its main indices closed in the green on Monday, with Nasdaq recording the most gains as technology shares led the recovery. The catalyst was Antrhopic’s initial public offering (IPO), which revived AI enthusiasm. The pullback in oil prices may have also helped by somewhat easing inflation concerns, although they are on the rise again today.

Oil slipped yesterday after Saudi, Turkish and Pakistani officials held de-escalation talks with Iran. However, continuing Houthi attacks on Saudi Arabia limited the retreat as they leave supply risk elevated.

Gold rebounded from near the psychological round figure of $4,000 yesterday, but it resumed its slide today, currently testing waters slightly below that barrier. A hawkish hold by the Fed tomorrow could encourage the bears to clear that territory and aim for the 3915 zone, which offered strong support back in October and November 2025.