Dollar Edges Lower on Monday

The dollar index edged down to 99.5 on Monday, pausing after a three-session rally that had lifted the greenback to a two-week high, as traders increased their bets on a Fed rate hike in September. Comments from Fed Chair Warsh at the Jackson Hole Symposium on Friday reinforced those expectations, with Warsh saying the Fed would “have work to do” if policymakers did not gain confidence that inflation was moving toward the 2% target. Warsh has consistently emphasized the need to bring inflation down, although the Fed kept interest rates unchanged at both its June and July meetings, leaving some uncertainty over the timing of a potential move. Markets are pricing roughly a 64% probability of a 25 bps rate hike in September. Traders now await a series of key economic data that could help determine the Fed’s next steps, including Friday’s jobs report. The dollar index is set to decline around 0.2% in August, marking a second consecutive monthly loss.

The dollar index traded around 99.6 on Monday after rising sharply in the previous session, as hawkish remarks from Federal Reserve Chair Kevin Warsh led traders to increase bets on an imminent interest rate hike. In his Jackson Hole address on Friday, Warsh warned that inflation is not slowing meaningfully and reaffirmed that policymakers remain committed to returning inflation to their 2% target. Markets are now pricing in around a 57% chance that the Fed will raise rates by 25 basis points in September, up sharply from about 40% a week ago. A surprise upward revision to the University of Michigan’s consumer sentiment index also provided support for the dollar. Investors now turn their attention to Friday’s August jobs report for greater clarity on the outlook for US monetary policy. Elsewhere, oil prices jumped after the US military targeted Iranian rocket launchers preparing to deploy mines into the Strait of Hormuz, boosting safe-haven demand for the greenback.

The US dollar index rose to 99.5 on Friday, extending the rebound from the three-month low of 98.8 from August 21st, and tracking the surge in short-term Treasury yields after Fed Chairman Kevin Warsh signaled a firmer stance against inflation. The Fed Chairman stated that underlying inflation was not significantly lower in the last few months and added that the labor market appears to be at full employment. On top of that, Warsh stated that the Fed is tracking the PCE index as an inflation gauge, using stricter rhetoric than earlier suggestions that one of the newly created task forces could shift the Fed's target gauge. Rate futures reflected a swing to positions of a Fed rate hike next month. Also strengthening the dollar, annual revisions to nonfarm payrolls were well under recent amounts, indicating robust employment. In the meantime, signs of higher inflation in the Eurozone added to the consensus of an ECB rate hike, limiting the rebound for the DXY.