Dollar Edges Lower as Fed Hike Bets Recede

The dollar index fell to around 99.5 on Monday, declining for a third straight session as cooling US economic data prompted traders to scale back expectations for an imminent Federal Reserve interest rate hike. Data released last week pointed to subdued US inflation, while consumer sentiment and retail sales weakened. Markets now see roughly a 67% probability that the Fed will hold rates in September, up from a below 50% chance priced in a month before. Investors are now awaiting the FOMC’s latest meeting minutes and Fed Chair Kevin Warsh’s speech at the Jackson Hole symposium for further guidance. Traders will also monitor the Empire State Manufacturing Index and NAHB Housing Market Index due later today. The dollar weakened broadly, falling the most against the Australian and New Zealand dollars, as well as the British pound.

The US dollar index fell past 99.6 on Friday, approaching the two-month low of 95.53 on August 7th as the latest economic data limited positions on a Federal Reserve rate hike. The retail sales control group unexpectedly dropped in July, challenging the view of sharp resilience from US consumers, even though volatile seasonal effects distort the reading. The results were released after both producer and consumer inflation softened in the period, seemingly pausing the urgency for the Fed to deliver a rate hike in their September meeting. Still, foreign funds remained relatively underweight on long-dated US Treasury bonds compared to earlier this year on concerns that high price indices and Fed complacency on inflation raised could lift inflation in the longer term. With the pressure on the currency, the DXY hovered close to its bottom after the US Treasury completed its joint intervention on the foreign exchange market with Tokyo to support the yen.

The dollar index fell to around 99.8 on Friday, sliding for the second straight session as subdued US inflation data prompted traders to dial back expectations for a Federal Reserve rate hike in September. Data released Thursday showed US producer prices were unchanged in July, providing further evidence that price pressures are not broadly accelerating following Wednesday’s tame CPI report. Moderating inflation reduces pressure on the Fed to raise interest rates in the near term, with markets now pricing in around a 35% chance of a 25 basis point rate hike in September, down from 55% a week earlier. The latest figures also suggest that the initial inflationary impact of the Middle East conflict and higher energy costs may be fading. However, uncertainty over a potential deal to end the wat and reopen the Strait of Hormuz continues to pose risks to the inflation outlook.