United States Dollar Index weakens further amid correction in US bond yields

The US Dollar Index (DXY) continued to decline on Friday as US Treasury Yields corrected after failing to extend its rally. The DXY, which measures the Greenback's value against six major currencies, slipped 0.1% to near 102.02. The 10-year US Treasury Yields fell to around 5.23%, down from Thursday's high of 5.35%. The selling pressure on the DXY was fueled by oil prices pulling back after President Donald Trump ruled out the possibility of military action against Iran before the November mid-term elections.

President Trump tweeted on Truth Social that the US would "not be attacking Iran at any time prior to the Midterm Elections to be held in the United States on November 3rd." Later, he added that "we are having productive discussions with the Islamic Republic of Iran." The major factor driving the movement of the US Dollar will be the September Consumer Price Index (CPI) data, expected to be released on Wednesday.

This data will significantly impact Federal Reserve (Fed) interest rate expectations. Currently, the CME FedWatch tool indicates that financial markets have priced in at least one interest rate hike for the rest of the year. The Dollar Index Spot is trading at 102.03 and is supported by the 20-day exponential moving average (EMA) at 101.24, suggesting a bullish near-term bias.

However, a decisive break below the 20-day EMA could weaken the bullish structure and pave the way for a deeper corrective phase toward prior price congestion zones. The yearly high for the DXY is 102.54. The US Dollar is the official currency of the United States and the de facto currency in several other countries. It is the most heavily traded currency globally, accounting for over 88% of all foreign exchange transactions, averaging $6.6 trillion per day in 2022.

The value of the US Dollar is primarily influenced by monetary policy set by the Federal Reserve, which aims to maintain price stability and promote full employment. The Fed achieves these goals by adjusting interest rates. When inflation is high and above the Fed's 2% target, the Fed raises interest rates, strengthening the Dollar.

Conversely, when inflation falls below 2% or unemployment is high, the Fed may lower rates, weakening the Greenback. In extreme cases, the Fed can print more Dollars and implement quantitative easing (QE), a last resort when lowering rates is insufficient. QE involves the Fed purchasing US government bonds, typically from financial institutions, adding more Dollars into the economy and weakening the US Dollar.