The US dollar index is trading in a narrow range during Thursday's Asian session, hovering near 98.75 and nearly flat on the day, after declining for three consecutive sessions. Market participants are closely watching Thursday's US Producer Price Index (PPI) and Friday's Consumer Price Index (CPI) releases, which will provide critical clues on the monetary policy outlook ahead of next week's Federal Reserve meeting.

Recent robust US employment data has prompted traders to increase their rate hike wagers. The CME FedWatch tool shows market pricing for a rate increase at the Fed's next policy meeting has climbed above 60%. However, a survey of economists reveals that most respondents expect the Fed to hold rates steady at the September 15-16 meeting and remain on hold for the rest of the year — a sharp contrast to the market's expectations. With recent economic data overall showing strength, several economists noted that the August CPI reading will be vital in solidifying their future rate path projections. The divergence between market pricing and institutional forecasts suggests that inflation data outcomes could trigger a significant repricing in the dollar index.

Investment institutions' flow indicators show that investor risk appetite is cooling. Their data reveals that "investors are cutting exposure to core sovereign bonds more aggressively than they are cutting global equities." The institution added that "rising global yields are increasingly putting pressure on bond fund flows," highlighting that upward pressure on interest rates is driving more pronounced outflows from core sovereign debt rather than from equities. This shift in fund flows reflects how the repricing of rate expectations is transmitting effects across asset classes.

While cross-asset fund flows reveal near-term pressure, institutions' views on the dollar's medium-term trajectory are equally noteworthy. Mitsubishi UFJ Financial Group (MUFG), in its September 2026 FX monthly report, outlines a specific path: using the August 28 spot rate of approximately 99.57 as a baseline, the DXY is projected to rise to 100.19 by the end of Q3 2026, retreat to 98.07 in Q4, before further declining to 96.53 in Q1 2027 and 96.20 in Q2. Near-term modest strength reflects America's relative growth advantage and policy uncertainty, but the medium-term trend is weaker, driven mainly by global growth rebalancing, policy divergence among other major central banks, and dollar valuation pressures. The report also provides corresponding FX forecasts, such as EUR/USD rising to 1.18 in Q4 and climbing further in 2027, indicating overall dollar weakness against major currencies. MUFG believes the dollar index will struggle to sustainably break above the 100 level, gradually giving back some gains before year-end, with further downside opening up entering 2027.

In summary, the CME FedWatch tool shows rate hike probability exceeding 60%, but most economists expect the Fed to hold rates steady at the September meeting and for the remainder of the year, creating a notable gap between market pricing and institutional expectations. Thursday's PPI and Friday's CPI data will be key to resolving this divide — stronger-than-expected inflation would reinforce rate hike bets and support the dollar, while softer data could push the greenback lower. Meanwhile, rising global yields are pressuring bond fund flows, with investors trimming core sovereign bond positions more than equities, reflecting a shift in risk appetite across asset classes. At 14:02 Beijing time, the US dollar index was at 98.73.