The dollar faced instability on Monday, even with an increase in U.S. rate hike expectations, as tensions in the Middle East heightened the likelihood of wider inflationary pressures that might compel global central banks to tighten their policies simultaneously. A shift in sentiment toward the Japanese yen, coupled with concerns regarding the escalating U.S. debt and prevailing policy uncertainties, exerted downward pressure on the greenback. Currency movements were relatively muted during early trading in Asia, coinciding with the closure of U.S. markets for a holiday. The dollar, however, faced challenges in maintaining the temporary boost it experienced following Friday’s robust U.S. jobs report.
The euro experienced a slight increase, trading at $1.1618, whereas sterling remained relatively stable at $1.3519. Against a basket of currencies, the dollar declined by 0.07% to 99.09, remaining close to its recent low of 98.558.
Traders adjusted their expectations to reflect an approximate 57% probability that the Federal Reserve will implement a rate hike this month following the release of nonfarm payrolls, with significant emphasis now placed on the upcoming inflation data on Friday. “A hot CPI print would all but seal a September hike and underpin a firmer U.S. dollar. A cooler reading would strengthen the case for a hold and leave the U.S. dollar vulnerable to a dovish Fed repricing,” said Elias Haddad. “Even if a September Fed hike becomes a done deal, we doubt the U.S. dollar will make new cyclical highs. Tightening by other major central banks limits policy divergence.”
The inflationary impulse from still-elevated oil prices is a major reason the European Central Bank is seen certain to lift rates to 2.75% on Thursday. Futures indicate a 75% probability of an additional increase to 3.0% by December.
Markets are currently reflecting a 75% probability that the Bank of Japan will increase rates by a quarter point during its meeting on September 18, alongside a 60% likelihood of an additional adjustment by December. The yen rose more than 0.2% to 155.88 per dollar on Monday, extending gains after Japanese Prime Minister Sanae Takaichi’s economic adviser projected a BOJ hike this month. The Japanese currency experienced an increase of over 2% last week, driven by a combination of factors such as the unwinding of carry trades and anticipations of capital repatriation that would enhance the yen.
Eric Robertsen stated that although carry trades have been among the strongest macro performers year-to-date despite a surge in borrowing costs globally, the “recent burst” of yen strength poses a “potential threat to carry outperformance”. And “If the JPY were to strengthen persistently, this may signal that the increase in JPY and USD rates is starting to trigger a change in asset allocation,” he said. In other currencies, the Australian dollar appreciated by 0.12% to $0.7208, whereas the New Zealand dollar remained unchanged at $0.5880. Bitcoin steadied above the $80,000 level and was last at $80,145.95, having drawn support recently as investors diversified away from the dollar into other assets.
