Dollar strengthens as ISM services data fuels Fed rate hike debate

The dollar strengthened against the yen, trading at 158.12 yen, up 0.17% from Friday's close. The pair's range for the session was between 157.44 and 158.19, with early dips recovering above 158.00 before Tokyo's lunch break. The dollar has gained 2.4% against the yen this month, marking three consecutive weeks of yen decline.

Monday's U.S. data showed the ISM services index for September at 54.9, slightly below the 55.1 forecast. However, details were firmer: the prices-paid component rose to 74.0, the highest since July 2022, and employment rebounded to 50.1. These figures reignited debate over a potential October Fed rate hike, which had dipped to 20.5% after weak payrolls data.

In Japan, Tokyo core inflation accelerated to 2.7% in September, surpassing the Bank of Japan's 2% target for the first time in nine months. The central bank's policy meeting summary indicated growing support for further rate increases, with the 10-year government bond yield reaching 3.12%, its highest since August 1996. Japan's finance ministry remains vigilant about the dollar's approach to the 160 yen level, a threshold that triggered coordinated intervention in July.

The dollar-yen pair has seen significant volatility over the past ten weeks, ranging from 152.89 to 164.00. Despite the Bank of Japan's rate hike to 1.25% in September, the yen's strength was short-lived. Analysts note a pattern of lower highs, suggesting the pair may have peaked below 160. The long-term range remains between 140 and 160, with the pair currently in the top eighth of that band.