Dollar slips to June lows as cool U.S. data fuel 70% Fed pause probability

The U.S. dollar dropped to its lowest point in over two months on Monday, continuing its overall decline after a series of moderating domestic economic indicators led global currency traders to significantly reduce expectations of Federal Reserve rate hikes. The Dollar Spot Index fell 0.3% to 99.33, marking its lowest level since June 5 as it breached crucial technical support levels.

This came after a series of cooling macroeconomic data from the United States, including a contraction in July nonfarm payrolls, a flat Consumer Price Index, a static Producer Price Index, and a surprising 0.6% decrease in retail sales for the same month. Such data weakened the case for further near-term rate increases.

Investors are now pricing in a 70% chance that the Federal Reserve will maintain interest rates at their September policy meeting, with traders shifting their attention to Wednesday's release of the July FOMC minutes and the upcoming Jackson Hole Symposium for indications that the Fed may be moving towards a prolonged pause in policy tightening.

In Tokyo, the Japanese yen rose 0.1% to around 159.00 per dollar, hovering near the psychologically significant 160 level. The yen's modest gain occurred despite weaker-than-expected domestic economic growth, with Japan's economy expanding at an annualized rate of 1.1% in the second quarter, falling short of market forecasts of 2% and slowing from a revised 1.9% expansion in the previous quarter.

The yen, despite the growth miss, is held in check by ongoing intervention by the Bank of Japan. Reports suggest the central bank may be considering a more aggressive rate-hiking stance, possibly raising rates as early as September, providing a floor under the currency's value. Meanwhile, the Indian rupee faced renewed selling pressure, with the USD/INR pair rising 0.2% as local importers scrambled for dollars due to ongoing Middle East energy risks.

This vulnerability persists despite the Reserve Bank of India's intensive efforts to defend the currency. Last Monday, the RBI unexpectedly shortened the deadline for commercial banks to utilize its discounted foreign-exchange swap facility for FCNR(B) accounts from late September to August 31, aiming to soak up excess liquidity in the banking system.