Dollar Index Hits 11-week Low

The dollar index hovered around 100 on Tuesday, while US Treasury yields declined as oil prices tumbled on growing optimism that diplomatic efforts could bring an end to the US-Iran conflict, prompting investors to scale back expectations for a Federal Reserve interest rate hike in September. Qatar said mediators were making progress in negotiations, while Treasury Secretary Scott Bessent said a deal to reopen the Strait of Hormuz could be reached as early as Tuesday or Wednesday. Investors also assessed a fresh batch of US economic data. Job openings fell more than expected to 7.36 million in June, the trade deficit narrowed as imports declined more than exports, and factory orders unexpectedly fell 0.3%, marking a second consecutive monthly decline. The developments pushed the implied probability of a September Fed rate hike down to 57%. Markets now turn their attention to the ADP employment report and Friday's nonfarm payrolls for further clues on the Fed's policy outlook.

The dollar index hovered near 100 on Tuesday after rebounding in the previous session, as investors continued to evaluate the outlook for Federal Reserve monetary policy amid ongoing uncertainty in the Middle East. Markets are currently pricing in about a 65% chance of a 25 basis point Fed rate hike in September after the central bank left interest rates unchanged in July. Bank of New York Fed President John Williams monetary policy remains well positioned, adding that inflation is expected to ease during the second half of the year. Investors are now awaiting the latest JOLTS job openings report and international trade data due later today for further insight into the strength of the US economy. Elsewhere, the dollar regained some ground against the yen after the US and Japan confirmed coordinated efforts to support the Japanese currency, though the possibility of additional interventions continues to keep markets on edge.

The dollar index fell to 99.8 at the start of August, the lowest in seven weeks amid fresh strength from the yen, while foreign investors maintained their partial pivot out of dollar positions from last week. The Japanese yen extended its surge after the US Treasury bought more of the Japanese currency with its large euro holdings, magnifying the initial yen rebound when Tokyo intervened in the currency market. The developments added to the dollar's slide following the Federal Reserve's last meeting. The US central bank maintained its rates unchanged, as expected. However, Fed Chairman Warsh signaled some reluctance to confirm that a rate hike would be his preferred reaction to higher inflation, leading foreign markets to trim holdings of dollar-denominated assets. Still, rate futures show that over half of the market is positioned for Fed hike in September.