By Rania Gule, Senior Market Analyst at XS.com – MENA
At the start of the week, the U.S. Dollar Index recorded modest gains, approaching the 99.75 level during early Asian trading hours, in a market environment marked by caution and anticipation. This mild rise comes as traders scale back their bets on further Federal Reserve rate cuts, giving the dollar a limited yet meaningful boost in confidence. From my perspective, this price behavior does not reflect genuine fundamental strength as much as it represents a “temporary pause” in the broader weakening trend that has characterized the dollar in recent weeks, pending a new catalyst that could emerge from upcoming manufacturing data.
The markets are currently navigating a delicate balance between real economic data and monetary policy expectations. Although the Federal Reserve cut rates by 25 basis points in October, as widely anticipated, it has left the door open for an extended pause before taking any additional steps. Chair Jerome Powell’s comments emphasizing the need to “see a clearer picture of the economy” before making further moves were a clear signal that the Fed will not risk excessive easing at the expense of price stability. In my view, these remarks underscore the difficult balance the Fed is trying to maintain between containing inflation and supporting growth—a balance that currently leans toward preserving price stability, even at the cost of a temporary slowdown.
Supporting this view is the hawkish tone expressed recently by several Fed officials, including Lorie Logan of the Dallas Fed and Beth Hammack of the Cleveland Fed, who both indicated they would have preferred to leave rates unchanged in the last meeting. Similarly, Jeff Schmid of the Kansas City Fed warned against the risks of resurgent inflation. These hawkish voices are not isolated opinions but rather a reflection of growing concern within the Fed that rushing into further rate cuts could undermine the progress made in stabilizing prices. From this standpoint, I expect the dollar to remain supported in the short term as long as the Fed’s tone stays data-dependent and firm.
That said, the recent moves in the Dollar Index do not necessarily mark the beginning of a new upward trend. The probability of another rate cut in December—though down from 93% to around 68%—remains on the table. This means investors are not yet convinced that the Fed will fully halt its easing cycle. Any signs of weakness in upcoming data—particularly in the ISM Manufacturing PMI—could quickly revive rate-cut expectations and weigh on the dollar again. In my opinion, the market currently sits in a state of “fragile equilibrium,” where monetary policy and economic performance compete to set the tone, and any tilt toward one side could drastically shift the landscape.
The forthcoming ISM Manufacturing PMI data will serve as a key test for this balance. As a leading indicator of industrial activity, it often serves as an early signal of the U.S. economy’s health. If the data exceed expectations, it will reinforce the Fed’s cautious stance and lend the dollar temporary strength. However, if it disappoints and points to deeper contraction, it could reignite rate-cut bets and prompt traders to trim long dollar positions. From my viewpoint, the latter scenario is more probable given recent signs of cooling demand and moderating consumer spending.
On another front, the ongoing political gridlock between Republicans and Democrats over the government shutdown—now entering its sixth week—remains a growing concern for markets. The longer it persists, the greater the risk to growth and consumer confidence, which could eventually drag the dollar lower. I believe investors are starting to realize that the dollar’s current strength is not built on robust economic momentum but rather on a relative lack of appealing alternatives, particularly amid the weakness of the euro and yen. However, this temporary advantage is unlikely to last if political uncertainty deepens and industrial activity continues to slow.
Technically, the Dollar Index faces strong resistance near the psychological 100 level—a barrier it has failed to break in recent weeks. Continued trading below this level reinforces the view that the current rise is corrective rather than the start of a new bullish phase. A break below 99.30 could signal the beginning of a deeper correction toward 98.70, especially if manufacturing data fall short of expectations. In my assessment, any attempt to test the 100 mark will require a strong positive surprise in the economic data—something that seems unlikely in the near term.
Overall, the U.S. dollar stands at a critical crossroads. Between the Fed’s hawkish tone and the economy’s signs of deceleration, traders face a complex equation that demands close reading of incoming data. I expect that the Dollar Index will likely maintain a tight trading range around current levels until manufacturing results clarify the outlook, with a slight downside bias should industrial weakness or political risk intensify. In my view, any dollar strength in the coming days should be seen as a short-term opportunity for tactical traders rather than a signal of a structural bullish shift.
At this stage, the market appears to be in a fragile balance, where the dollar holds onto psychological support but lacks sustainable fundamental drivers. The near-term direction will depend on industrial performance, monetary policy signals, and, most crucially, the U.S. economy’s ability to retain its momentum amid inflationary pressures and political gridlock. Until the picture becomes clearer, the dollar is likely to fluctuate between uncertainty and cautious optimism.