The US dollar has pulled back from two-month highs after traders slashed the odds of an October Fed rate rise, while oil prices also fell. New York Fed President John Williams played down the urgency of further tightening, but strong Friday labour data could still shift the balance back toward hawks on the FOMC.
The dollar retreated from two-month highs as the probability of an October Fed rate rise slumped from 72% to 45%, compounded by a fall in oil prices. The dollar index has repeatedly stalled above 101 over the past year, the same level where the corrective rebound in May 2025 halted and where the climb from the lows seen at the start of 2026 has stalled again. Still, the greenback is ending September with its best performance since June, driven by the Fed's hawkish shift and a surge in long-term Treasury yields to 24-year highs that has fueled its rally over the past three weeks.
Williams tones down the urgency
According to New York Fed President John Williams, there is no urgency to make further changes to monetary policy following September's move. Inflation remains high and another rate hike will most likely be required, he said, but he toned down the sense of urgency, signaling he leans toward a hike before the end of the year. That shift caused the dollar to pull back as markets reassessed the outlook.
Williams is regarded as the voice of the centrists on the FOMC. However, the balance of power could tilt back toward the hawks if strong US labour market data is released on Friday. Markets have not abandoned the idea of an October rate rise, which keeps the dollar in a strong position. His comments also landed on fertile ground: the foreign exchange market was already ripe for profit-taking after the dollar's run to the top of its range, with traders trimming positions at the end of the month and quarter ahead of key data releases.
Yen and euro pull in opposite directions
The yen rose to two-week highs on verbal intervention from Japanese officials and expectations that the Bank of Japan will raise rates from 1.25% to 1.5% as early as its October meeting. If the BoJ hikes while the Fed holds steady, the decline in USDJPY may continue.
The euro is still reeling from Christine Lagarde's dovish surprise, after the ECB President echoed Kevin Warsh's argument that the rally in bond yields is tightening financial conditions and doing the European Central Bank's job for it. Similar rhetoric from the Fed chair recently pushed the dollar down; now it is the euro's turn, and EURUSD fell toward 16-month lows, just above 1.1300.
Pound gets a reprieve
The dollar's retreat has breathed new life into GBPUSD, even as the pound contends with the rising likelihood of a fiscal and energy crisis. Diesel prices in Britain are hitting record highs, while sterling's monthly implied volatility has jumped to its highest level since July, a sign of trader nervousness ahead of the budget announcement.
Source: ActionForex
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