US Dollar Falls Below 102; Are Markets Beginning to Question the Fed’s Next Move?

The US Dollar Index (DXY) weakened, slipping below the 102 level during trading on Tuesday (October 20, 2026), as investors turned cautious ahead of the Federal Reserve’s (Fed) interest rate decision scheduled for October 27–28. This decline comes amid uncertainty regarding the direction of US monetary policy, with market participants awaiting the Personal Consumption Expenditures (PCE) inflation report—a key indicator used by the Fed to determine interest rate policy.

Despite the dollar’s ​​weakness, the market still assigns an approximately 83% probability that the Fed will hold interest rates steady at its October meeting. However, for December, market participants are pricing in a 94% chance of a rate hike. This divergence in expectations suggests that investors believe the Fed may opt to wait in the short term, while keeping the door open for policy tightening should inflationary pressures in the United States remain elevated.

Previously, on Friday, Fed Chair Kevin Warsh declined to provide any hints regarding the outcome of this month’s Federal Open Market Committee (FOMC) meeting. Warsh noted that higher-than-expected inflation has not altered his assessment of the US economic landscape. This stance has led investors to hold off on major decisions while awaiting further economic data—particularly the PCE report—which could offer a clearer picture of the intensity of inflationary pressures and the likelihood of interest rate adjustments.

In Europe, the euro has shown a modest recovery as various governments work to contain a wave of demonstrations that had previously escalated into unrest. The easing of some political concerns has helped support the euro, putting downward pressure on the US Dollar Index. Meanwhile, the Japanese yen remains weak, even though Bank of Japan (BoJ) Governor Kazuo Ueda indicated that Japan’s core inflation is moving closer to the 2% target. These developments highlight that global currency movements continue to be driven by diverging central bank policies and geopolitical sentiment. Looking ahead, the direction of the US dollar will largely depend on the PCE inflation data and the Federal Reserve’s decision next week. If inflation rises more than anticipated, the dollar could strengthen as the market becomes increasingly convinced that US interest rates will remain high or be hiked further. Conversely, if inflation begins to cool, the dollar may face continued pressure, potentially creating room for other major currencies—as well as gold—to gain strength. With the DXY currently sitting below 102, the market is waiting to see whether this weakness in the dollar is merely temporary or the beginning of a shift in trend ahead of the Fed’s decision.