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

The dollar remained stable on Monday as the yen reached a recent seven-month high, hovering near 153.49 per US dollar. Speculators began trading the yen in net long positions for the first time since February, signaling a potential shift in market sentiment ahead of monetary policy meetings by the Federal Reserve and Bank of Japan. Investors are considering the possibility of rate hikes from both central banks during a crucial week for monetary policy.

The Federal Reserve and Bank of Japan are grappling with fluctuating inflation pressures from the six-month-long Iran-Israel conflict, which has driven oil prices well above $100 per barrel and disrupted rate expectations amid significant bond sell-offs. The European Central Bank raised rates last week and signaled further increases, creating a backdrop for the Federal Reserve's policy decision on Wednesday and a likely rate hike from the Bank of Japan on Friday. The Bank of England is expected to maintain rates on Thursday, with a potentially close vote.

Global policymakers are divided on whether to raise rates, as concerns over the Fed's policy credibility persist. Despite the rising yields and evolving rate expectations, the dollar has not strengthened as central banks across major economies plan to hike rates. Traders have increased bets on a Federal Reserve rate hike following data indicating a surge in US consumer prices in August. According to the CME FedWatch tool, there is an 86% chance of an increase this week, with another potential hike later in the year.

However, the Federal Reserve might decide to wait, with some economists arguing that postponing a rate hike until after the US midterm elections is more appropriate. Shane Oliver, chief economist and head of investment strategy at AMP, suggested that waiting until December would be too long. The US dollar index, which measures the greenback against six other currencies, hovered steady at 99.15 after two consecutive weeks of minimal declines.

US Treasury yields remained near multi-year highs, with the 2-year yield easing slightly to 4.6148% after rising 26 basis points the previous week. As central banks globally prepare to raise rates, worries about the Federal Reserve's policy credibility have not prompted the dollar to rally further. ING analysts believe that a rate hike would bolster the Fed's monetary policy credibility and provide a slight boost to the dollar.