Dollar Falters Amid Rate Hike Bets, Inflation Concerns

The US dollar struggled to gain traction on Monday despite an increase in expectations for a Federal Reserve rate hike. The shift in sentiment was partly due to Middle East tensions, which raised concerns about inflationary pressures and prompted global central banks to consider tightening policy.

However, the dollar's brief lift from Friday's strong US jobs report was short-lived as traders moved to price in a 57% chance of a rate hike this month. The outcome now depends on Friday's inflation data, with a hot CPI print likely to seal a September hike and underpin a firmer US dollar.

Despite the potential for a rate hike, analysts doubt that the US dollar will make new cyclical highs due to tightening by other major central banks limiting policy divergence. The European Central Bank is seen lifting rates to 2.75% on Thursday, while markets imply a 75% chance of another hike to 3.0% by December.

The Japanese yen rose over 0.2% to 155.88 per dollar on Monday, extending gains after Japanese Prime Minister Sanae Takaichi's economic adviser projected a BOJ hike this month. The recent burst of yen strength is a potential threat to carry outperformance, according to Eric Robertsen, global head of research and chief strategist at Standard Chartered.