DXY: Dollar Trades Near 18-Month Top Ahead of Key Inflation Report. What to Watch.

Elevated US rates and weakness elsewhere keep the greenback supported. Wednesday’s inflation report could reshuffle the FX board.

💵 The dollar pauses without surrendering its gains

• The US dollar index DXY hovered near 102.1 early Monday, holding close to the 18-month high reached last week. Trading was subdued with Japan on holiday.
• The greenback’s gauge measures the dollar against six currencies, with an important imbalance: the euro accounts for 57.6% of its weighting. The yen, pound, Canadian dollar, Swedish krona and Swiss franc make up the remainder.
• Across the major pairs, EUR/USD traded around $1.1210 and GBP/USD near 1.3245, while USD/JPY stood at ¥158.10 and USD/CAD around C1.4250. It’s a mixed bag: rising EUR/USD or GBP/USD indicates dollar weakness, while rising USD/JPY or USD/CAD indicates dollar strength.

📊 US rates and overseas weakness underpin the move

• US yields remain a substantial source of support. The 10-year Treasury ended Friday around 5.24%, keeping dollar assets competitive. Traders assigned around 17% probability to an October Fed hike and 86% to an increase by December.
• Europe’s fiscal difficulties weaken a major dollar alternative. Large deficits and political uncertainty in France have unsettled investors, while rising energy costs threaten growth.
• Higher European yields have offered limited support to the euro when markets interpret them as evidence of fiscal risk rather than stronger economic prospects.
• Canada is another example of diverging policy expectations. September employment unexpectedly fell by 68,300, reducing the probability of an October Bank of Canada hike to 25% from 40% before the report. The Canadian dollar touched an 18-month low in the meantime.

🎯 Inflation will test the dollar’s advantage

• Wednesday’s US CPI report arrives at 8:30 a.m. ET. Economists forecast annual headline inflation of 3.7% and core inflation of 2.5%. Persistent underlying price pressure could reinforce tightening expectations; a softer reading could weaken the yield support that has helped sustain the dollar’s rally.
• Oil complicates that outlook. Brent eased toward $103 after Trump’s proposed Russia–Ukraine energy ceasefire raised hopes for additional supply. Confirmation remained incomplete, though.
• Thursday’s producer prices and retail sales come as the next assessment. Watch whether price pressure is easing alongside resilient spending, then how Treasury yields and Fed expectations respond.