Dollar Holds Advance After Mixed Data

The dollar index fell to below 99.8 on Wednesday, the lowest in seven weeks, holding the sharp decline triggered by intervention on the yen and foreign selling of long-term, dollar denominated fixed-income assets last week. The recent plunge for the yen and JGBs drove the US Treasury and the Japanese counterpart to buy an estimated $88 billion in JPY, with a portion of dollar selling featured in the intervention. The developments were in tandem with pressure from the Fed's latest rate hold. During the presser, 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. In turn, expectations of a Fed hike next month were dimmed by a fresh pullback in key energy prices and a soft ADP employment report.

The dollar index remained below the 100 mark on Wednesday, coming under renewed pressure as reports of an imminent interim agreement between the US and Iran to reopen the Strait of Hormuz drove oil prices sharply lower, easing concerns over inflation and the need for additional interest rate hikes. On Tuesday, Qatar said an interim proposal had been prepared, while both Washington and Tehran signaled progress in negotiations to restore access through Hormuz. US Treasury Secretary Scott Bessent also said a deal could be reached as early as Tuesday or Wednesday. Markets reduced expectations for a September Federal Reserve rate hike to around 57%, down from 67% a day earlier. Investors are now awaiting a series of US labor market reports for further clues on the Fed’s policy outlook, with ADP’s July private payrolls data due later today. Meanwhile, the dollar continued to nurse losses against the yen after the US and Japan signaled they remain prepared to intervene again if necessary.

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.