Dollar Holds Gains on Warsh Nomination

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.

The dollar index fell toward 99.5 on Monday, extending its decline to a fifth consecutive session after Japan confirmed it had carried out coordinated yen-buying operations with the US, while Bank of Japan data indicated the country may have spent as much as $58.97 billion on Thursday. Japanese authorities also warned they stand ready to conduct additional coordinated interventions if necessary, noting they remain in close contact with their US counterparts. In the US, investors are turning their attention to a full slate of labor market data this week, highlighted by Friday's closely watched monthly jobs report. Last week, the Federal Reserve left interest rates unchanged, although three officials dissented, warning that waiting too long to act could eventually require more aggressive policy tightening. Markets are currently pricing in about a 68% chance of a 25 basis point Fed rate hike in September.

The dollar index rebounded to 100.3 on Friday but remained down nearly 1.5% for the week, marking its worst weekly performance in three months and bringing its monthly decline to 1.3%. The greenback came under pressure as investors questioned whether the Federal Reserve is doing enough to bring inflation back to target. The Fed left the federal funds rate unchanged for a fifth consecutive meeting this week. While Chair Warsh reiterated the central bank's commitment to restoring price stability, he offered little guidance on the policy outlook for the remainder of the year. As a result, expectations for a rate hike at the September meeting eased, although markets continue to price in roughly a two-thirds probability of a 25bps increase.