Dollar falls to lowest since early June as rate hike bets fade

The dollar has sunk to its lowest level in over two months, as traders reduce expectations of U.S. interest rate hikes amid a string of weaker economic indicators. The Japanese yen has strengthened by 0.2%, reaching approximately 159.04 per dollar, despite weaker-than-anticipated growth figures in Japan. Markets are closely watching the Federal Reserve's upcoming Jackson Hole symposium for clues about policymakers' interpretation of recent economic data.

Japan and the U.S. have cooperated in efforts to curb the yen's decline, but the Bank of Japan's potential rate hike remains a key focus. April to June growth in Japan's economy was slower than expected, primarily due to inadequate consumer spending and business investments, which were largely attributed to one-off factors. The yen's performance is also influenced by the anticipated interest rate changes in the U.S. Recent data indicating a surprise fall in retail sales and low inflation has led investors to believe that the need for further hikes is diminishing.

Currently, there is only a 30.8% probability of a rate increase at the Fed's September meeting, down from 52.2% a week ago. However, analysts remain vigilant for potential rate hikes before the end of the year. Investors are also wary of incoming data, Jackson Hole commentary, and developments in the Middle East. The dearth of fresh guidance from the Fed has left participants navigating a more complex interest rate landscape.

When queried about their outlook on Fed policy rates, 10 people might provide 20 different answers. The dollar also weakened against the Chinese yuan, dropping 0.11% to 6.7372 in offshore trade, marking its weakest point since 2023. Industrial output growth in China decelerated, while retail sales expanded less than anticipated in July, according to Monday's data.