Dollar Steadies as Traders Weigh Fed Outlook

The dollar index steadied around 99.7 on Tuesday, holding gains from the previous session as investors continued to assess the outlook for Federal Reserve monetary policy ahead of key US inflation readings following a weak July jobs report. The closely watched consumer price index report is due on Wednesday, followed by producer inflation data on Thursday. Markets are currently pricing in around a 51% chance of a 25 basis point Fed rate hike in September, up from 44% a day earlier. Cleveland Fed President Beth Hammack said several rate increases may be needed to bring inflation back down to the central bank’s 2% target. Meanwhile, uncertainty persisted over a potential deal between the US and Iran to end the war and reopen the Strait of Hormuz, keeping markets wary of inflation and the outlook for interest rates.

The dollar index edged up to 99.7 on Monday, following a 0.4% decline last week that pushed the greenback to a two-month low. Traders are now awaiting this week’s CPI report for further clues on inflationary pressures, after Friday’s weaker-than-expected jobs report reduced expectations for a Fed rate hike in September. The odds of such a move currently stand at around 46%, down from approximately 64% a week ago, while the probability of the Fed holding rates is seen at about 54%. Meanwhile, traders continued to assess developments in the Middle East and ongoing talks to reopen the Strait of Hormuz, although a deal between the US and Iran appears unlikely in the near term. The dollar was mostly higher against the yen, with the Japanese currency giving back some of its intervention-driven gains while remaining well above the multi-decade low hit late last month.

The dollar index hovered around 99.6 on Monday after sliding sharply in the previous session, pressured by weaker-than-expected US employment data that lowered expectations for a near-term Federal Reserve interest rate hike. Nonfarm payrolls unexpectedly declined by 23,000 in July, while steep downward revisions to the prior two months further signaled a deterioration in labor market conditions. Markets now see around a 44% probability of a 25 basis point rate hike in September, down from 67% a week earlier. Investors are now turning their attention to key inflation data due this week for additional clues on the monetary policy outlook. Meanwhile, markets continued to track developments in the Middle East as Iran denied holding direct talks with the US, despite Washington’s claims that a deal was imminent. Tehran also maintained demands for an end to the US naval blockade, the lifting of sanctions and compensation for war-related damage before agreeing to any deal.