The US dollar remained near an 18-month high on Monday, as investors prepared for crucial US inflation data that could influence the Federal Reserve’s next interest rate decision. Meanwhile, the Indian rupee strengthened sharply following new measures from the Reserve Bank of India (RBI) aimed at reducing dollar demand and stabilizing the currency.
The US Dollar Index (DXY), which tracks the greenback against six major currencies, remained largely unchanged at 102.18 by 02:57 ET (06:57 GMT).
The index continued trading close to last week’s peak of 102.54, reflecting the dollar’s resilience amid geopolitical uncertainty and expectations surrounding US monetary policy.
US Dollar Holds Firm as Middle East Tensions Persist
Ongoing geopolitical tensions in the Middle East continued to support demand for the US dollar.
Over the weekend, Yemen’s Iran-backed Houthi militants launched attacks against Saudi Arabia, while additional strikes targeting commercial oil tankers raised concerns about potential disruptions to global energy supplies.
These developments increased uncertainty surrounding oil transportation and regional energy security.
Meanwhile, Brent crude futures recovered some of their earlier losses during Asian trading.
The partial rebound came despite US President Donald Trump’s announcement that Russia and Ukraine had agreed to an immediate ceasefire covering attacks on energy infrastructure.
However, significant uncertainty remained surrounding the proposed agreement.
Ukrainian President Volodymyr Zelenskyy indicated that Kyiv supported the initiative but was awaiting further details from Washington.
Russia had not immediately confirmed the arrangement, leaving investors uncertain about its implementation and durability.
As a result, geopolitical risks continued to influence currency markets and global energy prices.
US Inflation Data Could Determine the Fed’s Next Move
Beyond geopolitical developments, investors are closely monitoring upcoming US economic indicators.
The most important release will be Wednesday’s Consumer Price Index (CPI) report, which could provide fresh insight into inflation trends and the Federal Reserve’s monetary policy outlook.
The figures represent one of the final major economic releases before the Fed’s late-October interest rate meeting.
Traders increasingly expect policymakers to maintain their current interest rate settings rather than introduce another increase.
According to CME FedWatch data, markets currently assign an 81% probability that the Federal Reserve will leave interest rates unchanged in October.
That represents a substantial increase from the 51% probability recorded one month earlier.
A higher-than-expected inflation reading could revive speculation about additional monetary tightening, potentially supporting the US dollar.
Conversely, softer inflation figures could reduce expectations of further rate increases and place downward pressure on the greenback.
Consequently, Wednesday’s CPI report could become an important catalyst for the dollar and broader foreign exchange markets.
Indian Rupee Surges Following Reserve Bank of India Intervention
While the US dollar remained strong against major currencies, the Indian rupee recorded significant gains following policy measures introduced by the Reserve Bank of India.
The USD/INR exchange rate dropped as much as 1.1% to 95.739, reflecting a sharp appreciation of the Indian currency.
The pair later traded 0.7% lower at 96.123.
The rupee’s recovery followed a comprehensive package of central bank measures designed to reduce demand for US dollars and limit speculative activity in the foreign exchange market.
These actions demonstrate the RBI’s continued efforts to stabilize the Indian currency during a period of elevated global financial uncertainty.
RBI Introduces New Rules to Reduce Dollar Demand
The Reserve Bank of India announced several regulatory changes over the weekend to strengthen its control over foreign exchange transactions.
One of the most significant measures prohibits the rebooking of cancelled foreign exchange derivative contracts linked to the Indian rupee.
Additionally, the RBI tightened restrictions on currency transactions that lack underlying commercial or financial exposure.
Banks must also maintain cash reserves against certain derivative contracts, increasing the requirements associated with these transactions.
Together, these measures aim to discourage speculative trading and reduce unnecessary demand for foreign currency.
Special Dollar Purchase Window for Indian Oil Companies
The RBI also introduced a dedicated facility allowing state-owned oil marketing companies to purchase US dollars directly from the central bank.
Previously, these companies relied heavily on the spot foreign exchange market to obtain dollars needed for international energy purchases.
By offering an alternative source of dollar liquidity, the RBI aims to reduce pressure on the rupee and ease demand in the open market.
The arrangement is particularly relevant because India’s energy import requirements create substantial ongoing demand for US dollars.
Reducing that pressure could help stabilize the USD/INR exchange rate during periods of heightened volatility.
Analysts at MUFG noted that the central bank continues to support the rupee through measures designed to slow its depreciation.
However, the effectiveness of these interventions will also depend on broader market conditions, including oil prices and global dollar movements.
South Korean Won Strengthens as Asian Currency Markets React
Other Asian currencies also recorded movements against the US dollar during Monday’s trading session.
The South Korean won strengthened, with the USD/KRW exchange rate declining 0.6% to 1,332.58 won per dollar.
That marked the pair’s lowest level since October 2024, highlighting the Korean currency’s recent strength.
Meanwhile, the Japanese yen weakened slightly against the greenback.
The USD/JPY pair increased approximately 0.1%, indicating a modest appreciation of the dollar against Japan’s currency.
The Australian dollar remained relatively stable, with AUD/USD showing little movement.
These mixed performances reflected differing regional currency dynamics as investors assessed central bank policies, geopolitical developments and upcoming US economic data.
US Dollar Outlook: Inflation and RBI Policy Remain in Focus
The US dollar continues to trade near its strongest levels in 18 months, supported by geopolitical uncertainty and expectations surrounding Federal Reserve monetary policy.
However, Wednesday’s inflation figures could significantly influence the greenback’s next move.
Stronger-than-expected consumer inflation could reinforce expectations of restrictive US interest rates, while softer figures may reduce demand for the dollar.
Meanwhile, the Indian rupee’s sharp recovery demonstrates how targeted central bank measures can influence currency markets.
The RBI’s efforts to reduce speculative activity and redirect dollar purchases away from the spot market could provide additional support for the rupee.
Nevertheless, continued volatility in global oil markets and changes in US monetary policy expectations remain important risks.
For now, the US Dollar Index remains close to its 18-month peak, while the Indian rupee benefits from aggressive RBI measures aimed at stabilizing the currency.
Traders will closely monitor US inflation data, Middle East developments and the effectiveness of India’s foreign exchange interventions for further indications of market direction.
