Dollar Rally Unravels Amid Rising Expectations, Inflation Fears

The US dollar's recent rally remains unstable due to escalating tensions in the Middle East and broader inflationary pressures. These factors may force global central banks to tighten monetary policy simultaneously, limiting the dollar's potential for gains.

Despite rising expectations of a Federal Reserve interest rate hike, the dollar fell 0.07% to 99.09 on Monday. Traders estimate a 60% probability of a Fed rate hike in September after last Friday's strong non-farm payroll report.

However, the outcome largely depends on this week's inflation figures. If the Consumer Price Index (CPI) data is strong, a September rate hike is almost certain, supporting a stronger dollar. But if the figures are weak, the case for holding rates steady will be reinforced, making the dollar vulnerable to renewed dovish repricing by the Federal Reserve.

Elias Haddad, head of global markets strategy at BBH, noted that even if a September rate hike is a done deal, we still doubt the dollar can set new cyclical highs. Tightening by other major central banks limits the scope for policy divergence.