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

On Monday (Aug 17), the dollar slipped to its lowest level in over two months as traders reduced expectations of US rate hikes in light of weaker economic data, while the euro reached two-month highs and the yen strengthened. The yen climbed 0.13% to approximately 159.15 per dollar, despite disappointing Japanese economic growth figures.

Both Japanese and US authorities had intervened in currency markets in late July to curb the yen's decline. The dollar index, which calculates the dollar's value against a basket of currencies, saw some losses diminish after hitting its lowest point since early June. The euro gained 0.18% to approximately US$1.1614.

Investors are preparing for the Federal Reserve's upcoming Jackson Hole symposium, where they will seek clues on policymakers' interpretation of the latest economic data. The intervention by the US and Japan aimed at stabilizing the yen has altered the currency market landscape, leaving market participants pondering whether the Bank of Japan will raise interest rates soon.

Matthew Tuttle, CEO of Tuttle Capital Management, noted that the interventions changed the game but did not eliminate the interest-rate incentive for carry trades, where investors borrow in a currency with low interest rates, such as the yen, to invest in assets offering higher returns. The April to June growth rate of Japan's economy was weaker-than-expected, primarily driven by weak household spending and business investment.

The yen's performance is closely tied to the US interest rate outlook. A recent drop in retail sales and stable inflation last week led markets to believe that the need for further rate hikes was diminishing. The probability of a rate increase at the Fed's September meeting is now estimated at 30.6%, down from 52.2% a week earlier, according to the CME FedWatch tool.

However, Matthew Simons, chief US economist at Jefferies, stated that recent data inconsistencies warrant caution, as markets could remain sensitive to upcoming economic data, Jackson Hole remarks, and Middle East developments. The lack of fresh guidance from the Fed has made the rate environment increasingly uncertain, leaving investors navigating an increasingly murky terrain. Simons highlighted that asking 10 people about their outlook on Fed policy rates could yield 20 different answers.