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

The dollar index reached a two-week high of 99.6 on Monday, as traders increased expectations of a rate hike following hawkish comments by Federal Reserve Chair Kevin Warsh. Meanwhile, the Japanese yen slipped below the critical 160-per-dollar threshold. Fed Chair Warsh acknowledged the central bank would face challenges if policymakers fail to demonstrate progress in reducing inflation to the 2% target, signaling potential future tightening.

This stance helped alleviate concerns about currency debasement and renewed focus on economic fundamentals. Market participants now assign a 57% probability of a rate hike in September, with yields on two-year US Treasury notes climbing to a one-month high of 4.33%. Investors are now closely monitoring incoming US data, particularly Friday's nonfarm payrolls report and next week's consumer inflation figures, which could impact expectations heading into the September Fed meeting.

The euro edged up 0.1% to US$1.1591, while the British pound held steady at US$1.3539. 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. Despite this, the index still faces a second consecutive monthly decline, as earlier Treasury bond-buyback plans reignited debasement trades.

Dollar demand was bolstered by higher oil prices, with Brent crude rising nearly 2% following US strikes on Iran's Larak Island. The yen's weakness, along with heightened focus on the upcoming G20 finance ministers and central bank governors meeting, adds to pressure on the Japanese currency. Meanwhile, the New Zealand dollar remains unchanged at US$0.5916, and the Australian dollar gained 0.1% to US$0.7163.