Dollar gets little lift from boost in Fed hike expectations

The U.S. dollar faced difficulties on Monday, despite an increase in expectations of a Federal Reserve rate hike. Middle East tensions and concerns about global inflationary pressures, such as the potential need for other central banks to tighten policy, also impacted the dollar. The euro gained slightly to $1.1618, while the British pound remained stable at $1.3519.

The dollar declined 0.07% to 99.09, near its recent low of 98.558. Traders considered a roughly 57% probability of a September rate hike following Friday's strong U.S. nonfarm payrolls report, with the focus now on Friday's inflation data. BBH's global head of markets strategy, Elias Haddad, noted that a strong Consumer Price Index (CPI) print would likely lead to a September rate hike and strengthen the dollar, while a weaker reading could support a pause and leave the dollar susceptible to a more dovish Fed policy.

Even if a September hike is certain, the dollar is unlikely to reach new cyclical highs due to tightening by major central banks, which limits policy divergence. The inflationary impact of high oil prices is a key reason the European Central Bank is set to raise rates to 2.75% on Thursday, with a 75% chance of another increase to 3.0% by December.

Similarly, there is a 75% likelihood that the Bank of Japan will raise its rates by 0.25% at its meeting on September 18, with a 60% probability of further adjustments by December. The yen rose over 0.2% to 155.88 per dollar on Monday, continuing its gains following projections by Japan's Prime Minister Sanae Takaichi that the BOJ would raise rates this month.

However, Eric Robertsen, global head of research and chief strategist at Standard Chartered, warned that persistent yen strength may indicate that the rise in yen and dollar rates is prompting a shift in asset allocation. The Australian dollar increased 0.12% to $0.7208, while the New Zealand dollar stayed flat at $0.5880. Bitcoin remained stable above the $80,000 mark, trading at $80,145.95 after recently finding support as investors sought diversification away from the dollar.