The US dollar fell on Tuesday as oil prices retreated from recent gains, with investors weighing the Federal Reserve’s interest rate outlook and expectations that geopolitical tensions would remain contained ahead of the US midterm elections.
Market participants largely expect President Donald Trump to avoid escalating conflicts in the Middle East and Ukraine before the elections, amid concerns that further instability could hurt his political prospects.
Trump said last week that the US would not attack Iran before the midterms. He also raised the prospect of an energy ceasefire between Russia and Ukraine on Sunday.
Oil prices declined on Tuesday, putting crude on course for its first drop in nearly a week as traders assessed the possibility of additional diesel supplies from Russia.
The pullback in oil helped ease support for the dollar, which often strengthens when energy prices rise, putting pressure on currencies in oil-importing economies such as the euro and the Japanese yen.
The dollar index, which measures the US currency against a basket of six major currencies, dropped 0.25 per cent to 102.29. It had climbed to 102.61 on Monday, its highest level since April 2025.
US Inflation Report in Focus
Investors are turning their attention to Wednesday’s September consumer price index report for fresh indications of the Federal Reserve’s next policy move.
Market pricing showed an 80 per cent probability that the Fed would leave interest rates unchanged this month, up from 51 per cent a month earlier. Traders were also pricing in 75 basis points of monetary tightening by late 2027, according to the CME FedWatch tool.
Expectations of an immediate rate increase have weakened after two Fed policymakers called for more evidence before deciding whether additional tightening was necessary.
Daragh Maher, senior foreign exchange strategist at HSBC, said a stronger-than-expected inflation reading could prompt a market reaction but might not be enough to overturn expectations that the central bank would hold rates steady.
“While markets would react to a hawkish surprise, one CPI release may not be enough to undo a pause narrative that senior officials have seemed keen to establish,” Maher said.
He added that the Fed had repeatedly stressed the importance of assessing the full range of economic evidence rather than relying on a single data release.
Maher said a modest inflation surprise could reinforce expectations of a rate increase in December without significantly changing the outlook for October or the dollar.
Euro Recovers as French Fiscal Concerns Persist
The euro gained ground on Tuesday, recovering from its lowest level in around 17 months despite a fresh rise in European natural gas prices and continued concerns about France’s public finances.
The single currency rose 0.34 per cent to $1.1193 after falling to $1.11525 on Monday, its weakest level since May 2025.
Natural gas prices climbed to €86.30, their highest level since December 2022, adding to concerns about inflation across the eurozone.
Thierry Wizman, global foreign exchange and rates strategist at Macquarie Group, said the outlook for positive economic developments in the euro area remained weak.
He warned that further deterioration in France’s fiscal position or the effects of the energy shock could lead the European Central Bank to slow its pace of interest rate increases or stop them altogether.
A slower pace of tightening by the ECB could put additional downward pressure on the euro against the dollar, Wizman said.
Yen Strengthens as Japanese Prices Rise
The Japanese yen also advanced, gaining 0.28 per cent to 158.16 per dollar after data showed wholesale prices increased by 6.8 per cent in the year to September.
Although the increase fell short of the market forecast of 7.6 per cent, the pace of price growth continued to support expectations that the Bank of Japan could raise interest rates.
Elsewhere, the offshore Chinese yuan held near a four-year high against the dollar, trading at 6.6943.
The Australian dollar was little changed at $0.6968 following the release of minutes from the Reserve Bank of Australia’s September meeting, at which policymakers unanimously approved the fourth interest rate increase of the year.
The RBA said inflation could remain more persistent than previously expected, leaving open the possibility of another rate increase before the end of the year if price pressures fail to ease.
Currency markets are now awaiting the US inflation report for further clues about the Federal Reserve’s policy direction, while monitoring oil prices and geopolitical developments for signs of renewed pressure on the global economy.
Source: Reuters
