Dollar Downtrend Delayed Amid Fed Hike Expectations

The dollar's downtrend has been delayed due to expectations of a 25bp Fed hike on September 16, bringing interest rates to 4.00%. This hawkish stance by Kevin Warsh at Jackson Hole has altered market views, with short-dated US rates remaining unchanged until the fourth quarter of 2027.

A flatter US yield curve could keep the dollar supported against low-yielding currencies into early 2027. Meanwhile, a European Central Bank hike to 2.50% on September 10 may prove dovish due to pressure on French bonds ahead of budget season and elections next March.

Elsewhere, USD/JPY remains highly volatile, with expectations of a Japanese policy response driving prices down to 155. However, a Fed hike could see the pair trading in a wide 155-160 range rather than breaking lower just yet.