Dollar gets little lift from boost in Fed hike expectations

The dollar faced challenges on Monday as expectations for more US rate hikes grew, amid rising Middle East tensions and inflationary concerns that could prompt other central banks to tighten policy. Sentiment shifted towards the Japanese yen, while worries over mounting US debt and policy uncertainties pressured the greenback. Currency movements were modest in early Asian trading, with markets closed in the US for a holiday.

The dollar had briefly benefitted from Friday’s robust U.S. jobs data. The euro ticked up slightly at $1.1618, while the British pound held steady at $1.3519. The dollar slipped 0.07% to 99.09 against a basket of currencies, near its recent low of 98.558. Traders anticipated a roughly 57% probability of a Federal Reserve rate hike this month following Friday’s nonfarm payrolls release, with the outcome hinging on Friday’s inflation data.

BBH’s global head of markets strategy, Elias Haddad, noted that a strong CPI print would likely cement a September hike and bolster the US dollar. However, a weaker CPI reading could bolster arguments for a pause, leaving the dollar vulnerable to a dovish Fed repricing. Even if a September hike is confirmed, the dollar may not reach new cyclical highs due to tightening by major global central banks.

The elevated oil prices, a key inflationary driver, could see the European Central Bank raise rates to 2.75% on Thursday, with a 75% chance of further hikes to 3.0% by December. Similarly, there is a 75% chance the Bank of Japan will raise rates by a quarter point at its meeting on September 18, with a 60% probability of additional hikes by December.

The Japanese yen surged more than 0.2% to 155.88 per dollar, following projections from Prime Minister Sanae Takaichi’s adviser of a Bank of Japan rate increase this month. The yen had climbed over 2% the previous week due to factors like carry trade unwinding and expectations of capital repatriation that would support the yen. Eric Robertsen, global head of research and chief strategist at Standard Chartered, warned that the recent surge in yen strength could pose a threat to ongoing carry trade gains.

He suggested that persistent yen strength may indicate a shift in asset allocation as increasing rates in the yen and USD prompt adjustments. While Bitcoin steadied above the $80,000 mark, hovering around $80,145.95, its recent strength attracted investors seeking alternatives to the dollar.