US dollar index rises to near 101.00 on Fed Powell’s remarks on gradual rate cuts

• The US dollar index advances as the Fed’s Powell said the central bank will cut interest rates “over time.”
• The CME FedWatch tool suggests a 61.8% probability of a 25 basis point rate cut by the Fed in November.
• US ISM manufacturing PMI is expected to improve to 47.5 in September from 47.2 previously.

The US dollar index (DXY), which measures the value of the US dollar (USD) against six other major currencies, extended its gains for a second straight day. DXY is trading around 100.80 during Asian hours on Tuesday. The US dollar (USD) is gaining ground following the latest speech by Federal Reserve (Fed) Chairman Jerome Powell.

Fed Chairman Powell said the central bank is in no rush and will cut its benchmark rate “over time.” Powell added that the recent 50 basis point interest rate cut should not be seen as an indication of similarly aggressive actions to come, noting that future interest rate changes are likely to be more modest.

The CME FedWatch tool indicates that markets assign a 61.8% probability of a 25 basis point rate cut by the Federal Reserve in November, while the probability of a 50 basis point rate cut is 38.2% , down from 53.3% a day ago.

However, last week’s US core personal consumption expenditures (PCE) price index rose 0.1% month-on-month in August, below expectations for a 0.2% rise, in line with the Federal Reserve’s outlook that inflation is coming down in the US economy. This strengthened the possibility of an aggressive rate cut cycle by the Fed.

Traders could likely look to US manufacturing data, including the ISM Manufacturing PMI later in the North American session, which is expected to improve to 47.5 in September from the previous reading of 47.2. This report can provide reliable insight into the state of the US manufacturing sector.