Asian currencies weaken as dollar rises, yen holds near seven-month high

Asian currencies weakened against the U.S. dollar on Monday, as traders grew more confident a Federal Reserve rate hike was imminent, while the yen held near a seven-month high due to positioning for tighter Bank of Japan policy. The U.S. dollar index edged up 0.2% to 99.35, after rising 0.12% on Friday, ending a two-week slump.

The EUR/USD and GBP/USD pairs both fell, while the USD/JPY pair climbed, leaving the yen near its strongest level since February. The yen has appreciated about 4% this month as investors anticipate tighter monetary policy from the Bank of Japan and potential repatriation of overseas assets by Japanese investors. Markets now view an 86% chance of a Federal Reserve rate hike at its September 16 meeting, up from earlier expectations.

This has boosted the dollar and pushed up yields. The 10-year Treasury yield climbed to around 4.97%, while the two-year yield stayed above 4.6%. Three key central-bank decisions are scheduled this week: the Federal Reserve on Wednesday, the Bank of England on Thursday, and the Bank of Japan on Friday. The sequence of these meetings could influence global monetary policy expectations for the latter half of the year.

Despite the dollar's gains, other major central banks are also tightening policy, and doubts about the Fed's credibility have limited the greenback's upside. Brent crude oil prices rose nearly 3% to $107.60 a barrel following additional attacks in the Middle East, raising supply worries. Oil prices have remained above $100 a barrel, complicating central banks' outlook as higher energy costs could keep inflation elevated.

The yen's strength is largely driven by expectations of another 25-basis-point hike from the Bank of Japan on Friday. While markets have priced in this hike, the pace of subsequent tightening remains uncertain. The Bank of Japan's communication will be as crucial as the rate hike itself. The yen's 4% gain this month has begun to shift market positioning, with speculators now holding a net long position for the first time since February.

Meanwhile, the Australian dollar and New Zealand dollar declined, while Chinese and Hong Kong currencies were relatively stable. The USD/KRW and USD/SGD pairs both edged higher, while Indian markets were closed for a public holiday. Given the Federal Reserve, Bank of England, and Bank of Japan's policy decisions are all due this week, currency markets will likely continue to focus on the speed of rate adjustments and whether rising energy inflation will prompt central banks to maintain tighter policies longer.