Dollar Surges to Two-Month Highs Amid Fed Hawkishness and Global Political Uncertainty

The U.S. dollar demonstrated robust strength on October 10 (Korea time), with the Dollar Index (DXY) breaking past the 99 mark for the first time in over two months. A trifecta of rising Treasury yields, hawkish statements from Federal Reserve officials, and political and economic weaknesses in other major currencies like the euro and yen propelled the greenback to its highest level in weeks.

Dollar Index Soars on Treasury Yields and Safe-Haven Appeal

The Dollar Index increased by 0.59%, or 0.581 points, to reach 99.036 in the morning session, securing a two-and-a-half-month high. This surge was heavily supported by the climb in the U.S. 10-year Treasury yield, which rose to 4.142%. The higher yields bolstered demand for the dollar, already favored as a safe-haven asset amid volatile financial market conditions.

The risk-off sentiment across global markets further accelerated the dollar’s rally, as investors sought refuge in the greenback amid uncertain global economic and geopolitical conditions.

Federal Reserve's Hawkish Signals Stir Market Anxiety

Key remarks from Federal Reserve officials served as a catalyst for the dollar's rise, increasing uncertainty in market expectations around U.S. monetary policy. Michael Barr, a Federal Reserve Board member, urged caution regarding the potential timing of rate cuts, underlining lingering risks of persistent inflation tied to ongoing tariff effects. The commentary was interpreted as a hawkish signal, causing markets to revise expectations for policy loosening previously anticipated by the year-end.

New York Federal Reserve President John Williams added that any rate cut would likely depend on a notable rise in the unemployment rate above its current 4.3% level, alongside inflation nearing 3%. Despite Williams' tempered remarks, Barr's more assertive tone raised concerns that the Fed’s tightening cycle might extend longer than previously forecast.

Political Instability Pressures Euro and Yen

Developments in Europe and Japan contributed to the weakening of the euro and yen, while indirectly increasing the dollar's appeal.

In Europe, French Prime Minister Élisabeth Borne’s resignation during a cabinet reshuffle introduced new political uncertainties. Broader concerns about stability within the Eurozone, coupled with widening interest rate differentials favoring the U.S., weighed on the euro. While the euro recorded modest gains during the session, its upward momentum remained constrained.

In Japan, Sanae Takaichi's election as the new leader of the ruling Liberal Democratic Party heightened economic policy unpredictability. Known for advocating substantial fiscal stimulus, Takaichi is likely to support measures that delay rate hikes by the Bank of Japan, keeping the yen under pressure.

The yen fell to its weakest level in 7.75 months but found some limited support from Japan’s 10-year government bond yield, which rose to a 17-year high of 1.701%. However, persistent policy uncertainties regarding the Bank of Japan’s strategy continued to weigh on the currency.

Ripple Effects on Commodities and Cryptocurrencies

The dollar's strength sent shockwaves across other asset classes, disrupting trends in both commodities and digital assets.

Gold and silver futures experienced sharp declines of 2.41% and 3.76%, respectively, as the rising dollar diminished the appeal of precious metals, which are typically seen as inflation hedges.

Similarly, the digital asset market took a hit, with Bitcoin (BTC) dropping by more than 2%. The broader cryptocurrency market mirrored this downward trend, reflecting reduced risk appetite among investors amid the dollar’s dominance.

Markets Eye October FOMC Meeting

Looking ahead, the direction of the Dollar Index is likely to hinge on a combination of Federal Reserve policy signals and ongoing global political developments. Market participants are now setting their sights on the Federal Open Market Committee (FOMC) meeting scheduled for October 28–29.

The meeting is widely regarded as a significant turning point, with current market pricing indicating a 95% probability of a 25-basis-point rate cut. However, any deviation from this expectation could spark volatility in currency markets.

At the same time, investors will carefully monitor Europe’s political landscape and Japan’s economic policy trajectory, as these factors will continue shaping the dollar’s strength in the coming weeks.

In the context of rising global risks and shifting monetary policy dynamics, the U.S. dollar remains poised as a key barometer of market sentiment and investor confidence.