Dollar near two-week high as Warsh boosts rate-hike bets

The dollar index surged to its strongest level in two weeks, reaching 99.6, as traders grew optimistic about a potential Federal Reserve rate hike. This optimism stemmed from hawkish remarks made by Federal Reserve Chair Kevin Warsh, who suggested further tightening might be necessary to bring inflation down to the target of 2%.

Warsh's comments helped alleviate concerns about currency debasement and restored faith in the economic fundamentals of the US dollar. As a result, market participants have increased their expectations of a September rate hike, with the probability of a rate move now at 57%. This shift in focus from currency debasement to economic fundamentals has bolstered the dollar's position.

Investors are now closely watching upcoming US data, particularly the nonfarm payrolls report and consumer inflation figures, both of which could influence expectations ahead of the September Fed meeting. The euro saw a slight gain against the dollar, while the British pound remained relatively stable. The dollar index, which gauges the US currency against six major counterparts, dipped slightly to 99.6 after surging 0.6% on Friday to its strongest level since August 17.

Nevertheless, the index is still on track for a second consecutive monthly decline due to earlier US Treasury bond-buyback plans, which revived debasement trades. The dollar's strength was also bolstered by surging oil prices, with Brent oil rising nearly 2% after the US struck Iran's Larak Island, marking the first known American strike on Iran since late July.

Meanwhile, the Japanese yen weakened, with the dollar strengthening against it, adding pressure to the Japanese currency. The yen slipped to 160.01 per dollar, slightly below the 160-per-dollar level it reached on Friday. This drop in the yen stems from the still-widening rate gap, negative real rates, and the cautious pace of the Bank of Japan.