Dollar Holds Firm as Markets Bet on Hawkish Fed

The US dollar has maintained its strength despite the decline in oil prices, which had provided a breather for several Asian currencies. The decline in Brent prices, following a pause in attacks between the US and Iran, did not deter the dollar's hold on markets. Markets appear reluctant to price a sustained easing in inflation risks due to heightened geopolitical uncertainty and the proximity of this week's FOMC meeting.

According to MUFG Research, about 38% chance is being priced in for a 25bps Fed hike this week, while fully pricing for a hike in September. This underscores market expectations that the Fed may keep the door open to additional tightening should inflation pressures re-emerge. The FOMC decision will be a key market catalyst, with no policy change expected but focus on the Fed's guidance on its inclination to tighten policy.

The decline in oil prices has provided some relief for several Asian currencies, with INR leading gains against the dollar. However, the rupiah has weakened moderately due to institutional challenges and policy risks following the resignation of Bank Indonesia governor.