Dollar steady, yen near 7-month high ahead of Fed, BOJ meetings

The dollar remained stable on Monday as the yen approached a seven-month high, according to Reuters. Investors were speculating about potential rate hikes from both the Federal Reserve and the Bank of Japan (BOJ) during a crucial week for monetary policy. The ongoing conflict in Iran, which has driven oil prices above $100 per barrel, had disrupted the typical path for interest rates.

The European Central Bank had recently raised rates and indicated further hikes, setting the stage for the Fed's decision on Wednesday and a likely BOJ rate hike on Friday. The Bank of England was expected to maintain its stance on Thursday, though voting was likely to be tight.

As U.S. consumer prices surged in August, traders grew more bullish on a Fed rate hike, with an 86% chance now priced in by the CME FedWatch tool. The Fed might choose to delay action, but waiting until after the U.S. midterm elections in October or moving rates too late into 2024 would be problematic, according to Shane Oliver, chief economist and head of investment strategy at AMP.

The euro was trading at around $1.159, while the British pound was at $1.3524. The U.S. dollar index remained steady at 99.15 after two weeks of minimal declines. U.S. Treasury yields were near multi-year highs, with the 2-year yield easing slightly to 4.6148% after a 26 basis point increase the previous week.

Central banks across major economies were anticipated to raise rates, but concerns over the Fed's policy credibility were still a factor. ING analysts believed the dollar could benefit from a rate hike, strengthening the Fed's monetary policy credibility and dampening the depreciating currency trend. However, the dollar did not need to climb significantly, as this was seen as a policy recalibration rather than the start of a new cycle.

Brent crude futures surged nearly 3% to $107.51 per barrel as fresh tensions between Iran and Saudi Arabia, along with Iranian attacks on ships in the Gulf, further strained global oil supplies after a crucial Saudi oil pipeline was closed. The Japanese yen was at 153.49 per U.S. dollar, close to its seven-month high of 152.89, as market sentiment toward the currency began to shift, with speculators moving into a net long position for the first time since February.