US Dollar Extends Rebound

The dollar index rose to above 99.6, extending the rebound from the three-month low of 98.8 from August 21st, and tracking the surge in yields across the curve inflationary risks aligned with the outlook of a more hawkish Federal Reserve. The US and Iran reignited attacks against each other and further dimmed the small prospects that energy flows through the Strait of Hormuz could improve in the near term. The rise in energy prices added to inflationary pressures shortly after a series of FOMC members, including Chairman Warsh, warned that inflation could warrant a rise in interest rates. The Chairman also noted that the labor market has been under full employment recently, aligned with annual revisions to nonfarm payrolls that were well below recent downgrades. In the meantime, evidence of higher inflation in the Eurozone added to the consensus of an ECB rate hike, limiting the rebound for the DXY.

The dollar index rose above 99.5 on Tuesday, recouping losses from 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.