Dollar Steadies as Traders Assess Fed Outlook

The dollar index steadied around 99.5 on Tuesday after declining in the previous session, as investors continued to assess prospects for Federal Reserve interest rate hikes following hawkish comments from Chair Kevin Warsh and rising oil prices. Investors are also bracing for a busy economic calendar, with the latest US manufacturing and services activity data due later today, ahead of the highly anticipated August jobs report on Friday. Warsh said on Friday that the Fed will “have work to do” if policymakers lack sufficient confidence that inflation is moving toward 2%, signaling the potential for an imminent rate increase to curb persistent price pressures. Markets are now pricing in a more than 65% chance of a September hike, up from around 36% before his remarks. Meanwhile, oil prices climbed for a second straight day after US forces struck an island in the Strait of Hormuz, while Iran responded with attacks on the UAE and Jordan.

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.