Hawkish Fed Comments Boost the Dollar

The dollar index (DXY00) rose by +0.20% on Monday. The dollar moved higher on Monday amid hawkish Fed comments. Chicago Fed President Austan Goolsbee and St. Louis Fed President Alberto Musalem said the Fed may have to hike interest rates further to restore price stability. Dollar gains were limited on Monday after WTI crude oil prices plunged by more than -4%, which eased inflation expectations and could persuade the Fed to loosen monetary policy, a bearish factor for the dollar. Also, a stronger Chinese yuan undercut the dollar as the yuan climbed to a 3.5-year high on Monday.

Today's US economic news showed the Aug Chicago Fed national activity index fell -0.12 to -0.04, right on expectations.

Chicago Fed President Austan Goolsbee said that to restore price stability, the Fed may need to raise interest rates further and narrow the gap between supply and demand, which could lead to drops in employment, wages, and growth.

St. Louis Fed President Alberto Musalem said core inflation may be running 1 percentage point above the Fed's 2% target and that the Fed likely needs to hike interest rates further.

Markets are pricing in a 55% chance of a +25 bp Fed rate hike at the next FOMC meeting on October 27-28.

EUR/USD (^EURUSD) fell by -0.18% on Monday. The dollar's strength on Monday weighed on the euro. Also, Monday's decline in the 10-year German Bund yield to a 1-week low of 3.442% has weakened the euro's interest rate differentials.

However, Monday's -4% decline in crude oil prices supports the Eurozone economy and the euro, as Europe imports most of its energy. Also, Monday's monthly report from the Bundesbank was slightly hawkish and supportive of the euro as it projected stronger economic German growth in in Q4 with "persistently high" energy prices.

In its monthly report released on Monday, the German Bundesbank said Q3 GDP will expand only "modestly" in Q3 because of short-term drivers like low water levels in the Rhine River, but the economy is expected to grow at a "stronger" pace again in Q4 and will "remain on its current path to recovery." The Bundesbank added that "persistently high prices, not only for crude oil but also for natural gas and electricity, could amplify both direct and indirect effects and delay the return of the inflation rate to 2%."