The near-term outlook for the U.S. dollar remains constructive, supported by expectations of a hawkish Fed amid persistent inflationary pressures. Elevated oil prices and substantial AI-related spending have heightened concerns that inflation will remain stubborn, particularly as it continues to exceed the Fed’s 2% target.

These pressures could prompt the Fed to maintain a restrictive monetary stance, with markets increasingly anticipating further rate hikes in the coming months. This backdrop could keep the greenback well supported and present a tactical opportunity for investors seeking exposure to a stronger U.S. dollar.

According to TradingView, the U.S. Dollar Index (DXY) has gained 0.13% over the past five days and 3.30% over the past month. The index has advanced 4.45% over the past six months and 3.40% over the past year. Although DXY declined 0.25% in the latest trading session, the modest pullback does not necessarily undermine the bullish near-term outlook for the greenback, given the prevailing inflationary pressures and expectations of a hawkish Fed.

Inflationary Pressures Refuse to Fade

With inflation still above the Fed’s 2% target, expectations of further rate hikes remain elevated. Following an escalation in geopolitical tensions in the Middle East over the weekend, Brent crude prices touched $106.80 per barrel, while West Texas Intermediate (WTI) crude traded around $93.80 per barrel on Monday.

Persistently elevated oil prices are likely to add to inflationary pressures, reinforcing expectations that the Fed will maintain a hawkish stance at least through early 2027. Geopolitical tensions in the Middle East have remained volatile since the onset of the conflict between Washington and Tehran, with a lasting peace settlement appearing unlikely in the near term. Meanwhile, recent developments in the Russia-Ukraine war have done little to clarify the outlook, adding to uncertainty across global energy markets.

Oil prices are not the only factor fueling inflation concerns. Significant AI-related spending, war-related costs stemming from the Iran conflict and other economic pressures could further intensify inflationary pressures, reinforcing expectations of additional Fed rate hikes as policymakers seek to bring inflation under control.

Hawkish Fed Expectations Keep Dollar Bulls Hopeful

With markets increasingly anticipating a restrictive monetary policy stance from the Fed in the coming months, the dollar could remain well supported. The value of the greenback is closely related to the Fed’s monetary policies, as its value moves inversely with interest rate adjustments by the Fed. Therefore, expectations for a more hawkish Fed stance could provide further support to the dollar.

However, markets increasingly expect the Fed to hold rates steady at its October meeting before potentially resuming a hawkish stance in December. According to the CME FedWatch Tool, markets currently see an 80.6% probability of rates remaining the same at the October meeting. In December, markets estimate an 84.7% likelihood of the Fed hiking rates.

Per the CME FedWatch tool, the probability of rates being increased to 4-4.25% at the December meeting has surged to 69%, compared with only 48% a month earlier. However, the probability of a rate hike to 4.25-4.50% stands at 15.7%, down from 27.6% a month ago.

ETFs to Gain From Dollar Strength

Against this backdrop, the dollar could remain well supported through the remainder of 2026 and into the early months of 2027, especially as inflation concerns remain persistent and markets expect the Fed to maintain its hawkish bias during this period. This could support a constructive near-term bullish outlook for the greenback.

However, the dollar’s longer-term trajectory will depend on how inflation evolves and the Fed’s policy outlook. Investors should closely monitor monetary policy developments and broader economic conditions when evaluating their long-term dollar exposure and diversification strategies.

Below, we have highlighted ETFs that may benefit from a stronger U.S. dollar and are well-suited for investors with a bullish outlook on the greenback.

Invesco DB US Dollar Index Bullish ETF (UUP Quick QuoteUUP - Free Report)

Invesco DB US Dollar Index Bullish ETF offers exposure to a basket of currencies relative to the U.S. dollar, increasing in value when the dollar appreciates. UUP has gathered an asset base of $465.4 million and charges an annual fee of 0.70%.

Invesco DB US Dollar Index Bullish ETF has a one-month average trading volume of about 1.88 million and has a Zacks ETF Rank #3 (Hold), with a Medium Risk outlook.

The fund has added 4.4% over the past year and 5.3% year to date. UUP has risen 3% over the past month and 1.9% over the past three months.

WisdomTree Bloomberg U.S. Dollar Bullish ETF (USDU Quick QuoteUSDU - Free Report)

WisdomTree Bloomberg U.S. Dollar Bullish ETF employs an active strategy and has gathered an asset base of $312.8 million, charging an annual fee of 0.50%. USDU has a dividend yield of 3.64%.

The fund has a one-month average trading volume of about 338,000 and a Medium Risk outlook.

WisdomTree Bloomberg U.S. Dollar Bullish ETF has added 1.5% over the past year and 2.21% year to date. USDU has witnessed an upside of 0.51% over the past month and 0.80% over the past three months.