Dollar Falters Amid Rising Rate Hike Expectations and Global Economic Uncertainty
The US dollar struggled to gain ground on Monday despite rising expectations of a Federal Reserve rate hike. Middle East tensions have increased inflationary pressures, prompting global central banks to tighten policy. However, a shift in sentiment towards the Japanese yen and concerns over growing US debt and policy uncertainties weighed on the greenback.
US rate hike bets rose, with a 57% chance of a hike this month following Friday's blowout jobs report. But traders moved to price in inflation data due out on Friday, which could seal a September hike and underpin a firmer dollar. A hot CPI print would solidify the case for a hike, while a cooler reading would strengthen the argument for a hold.
A hot inflation print would 'all but seal a September hike' said Elias Haddad, global head of markets strategy at BBH. Even if a September Fed hike becomes a done deal, we doubt the US dollar will make new cyclical highs, as tightening by other major central banks limits policy divergence.
The yen rose more than 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. Eric Robertsen, global head of research and chief strategist at Standard Chartered, said that while carry trades have been among the strongest macro performers year-to-date despite rising borrowing costs, the recent burst of yen strength is a 'potential threat to carry outperformance'.