Dollar Heads for Best Monthly Gain in Nearly 18 Months on Sticky Inflation, Hawkish Fed and AI Capital Flows

The dollar is on track for its strongest monthly performance in nearly a year and a half, with the dollar index climbing in October to its highest level since May 2025 and gaining about 3.45% year to date. Stronger-than-expected inflation, expectations the Federal Reserve may resume rate hikes and capital inflows tied to AI investment have led several Wall Street firms to abandon bearish calls. CFTC data show asset managers and non-commercial traders hold roughly $40 billion in long-dollar positions, a bullish stance maintained since mid-March. Rate expectations are the core support. The Fed held rates steady on Wednesday but Chair Kevin Warsh signaled clear hawkish intent, saying officials are "prepared to act." The central bank's first rate hike in three years last month drove the dollar's best monthly performance since March, with market pricing continuing to underpin the currency. Manulife portfolio manager Nathan Thooft said the Nov. 3 midterm elections should not be overemphasized for the dollar's long-term path, arguing FX is driven more by relative growth, inflation, rates and capital flows. A divided government could reduce policy uncertainty, he added. BofA's Alex Cohen said Trump retains veto power over AI regulation legislation even if Democrats win a chamber, keeping the "AI trade" alive, and Citi's Daniel Tobon noted any post-election dollar pullback may be brief. Morgan Stanley has overturned its forecast for continued dollar weakness in 2026. Downside risks are building: Man Group's Kristina Hooper warned that slower AI capex would weaken U.S. growth and inflows, while oil up about 80% this year from the U.S.-Iran war and French fiscal deterioration pressure the euro and yen.