Dollar Holds Firm Amid Pro-Risk Turn as Fed Hike Fears Persist

The dollar is holding its ground despite a pro-risk turn in financial markets. A new US-Iran ceasefire deal could be announced today, which would allow traffic to transit the Strait of Hormuz for 60 days without a fee. Oil prices have been trading off this story all week, bringing Brent below $80/bl and delivering lower market interest rates and higher equity prices around the world.

This dynamic would normally be associated with a weaker dollar, as investors put money to work outside the US. However, the DXY dollar index continues to trade near 100, possibly due to lingering fears that the Fed might still hike on September 16th. Lower oil prices and softer JOLTS jobs data have seen pricing for this Fed move drop to +14bp from +16/17bp at the start of the week.

Today's ISM services release and the monthly ADP numbers will be key macro drivers, but regional surveys suggest the former should remain strong. An ADP release near consensus of 65k looks unlikely to hit the dollar too hard. Overall, we can probably see DXY trading in a tight 99.50-100.00 trading range today.

Treasury Secretary Scott Bessent yesterday provided some colour to the recent joint intervention on the yen. He stated that yen weakness could trigger competitive devaluations in the region, echoing concerns from last year's Mar-a-Lago accord discussions. His comments also seemed to imply a quid pro quo had been made with the Bank of Japan, where, in exchange for intervention, the BoJ would hike earlier than expected in September.