Dollar Hits 7-Week High as Fed's Collins and Barkin Sound Inflation Alarm

The dollar index (DXY00) climbed to a 7-week high on Tuesday and closed up 0.17%, buoyed by hawkish comments from two Federal Reserve presidents who warned that inflation pressures could stay elevated.

Boston Fed President Susan Collins said she saw an "increased likelihood" of scenarios in which inflation remains "notably above 2%." Richmond Fed President Tom Barkin cautioned that inflationary shocks could take time to wane and flagged the risk that elevated pressures become entrenched. Both signals point toward tolerance for additional Fed tightening.

The market has already moved on that message. Traders are pricing in a 55% chance of a +25 basis point Fed rate hike at the next FOMC meeting on October 27-28.

The dollar's advance had limits. WTI crude oil prices fell more than 1% to a 3-week low, easing inflation expectations and potentially giving the Fed room to loosen policy — a bearish factor for the currency. A weak September reading from the Richmond Fed manufacturing survey added to the pressure.

That survey fell -6 points to -2, a 7-month low, well below market expectations of 2. The miss complicates the hawkish narrative: softening real-economy data alongside sticky inflation leaves the Fed navigating conflicting signals heading into its October meeting.

Euro under pressure

EUR/USD (^EURUSD) fell to a 7-week low on Tuesday and finished down 0.18%. Dollar strength did most of the damage. Lower European government bond yields added to the drag after the 10-year German Bund yield dropped to a 1.5-week low of 3.422%, weakening the euro's interest rate differentials against the dollar.

The euro's losses accelerated after the Eurozone September consumer confidence index fell -1.0 to -16.5, weaker than the -16.0 analysts expected.

Two factors cushioned the decline. First, European Central Bank Chief Economist Philip Lane said a new wave of high energy prices means Eurozone inflation will stay elevated longer than the ECB initially anticipated — a comment that stoked expectations the ECB may have to keep tightening. Second, the 1% drop in crude oil prices to a 3-week low supports the Eurozone economy and the euro, given that Europe imports most of its energy.

Markets are discounting a 48% chance of a +25 basis point ECB rate hike at the bank's next policy meeting on October 29 — a day after the Fed's own decision.

What to watch

The back-to-back timing of the two central bank decisions on October 28 and 29 sets up a direct test of relative hawkishness. With the Fed at 55% implied odds of a hike and the ECB at 48%, the interest rate differential that has driven the dollar's rally this week remains the variable most likely to determine whether EUR/USD holds its 7-week low or breaks lower.