Dollar Strengthens on Warsh's Hawkish Comments and Renewed Gulf Tensions

The dollar held steady near a two-week high on Monday as markets increased bets of an interest rate hike following hawkish comments from Federal Reserve Chair Kevin Warsh and renewed Gulf tensions.

Warsh's remarks, which were made on Friday, indicated that further tightening may be necessary to curb inflation pressure. He stated that the U.S. central bank would 'have work to do' if policymakers do not get the confidence they need that inflation is heading down to 2%.

The implied probability of a rate hike in September rose to 57%, while yields on interest-rate-sensitive 2-year U.S. Treasury notes held near their highest level in over a month at 4.33%. OCBC's FX strategist Sim Moh Siong attributed the dollar's strength to Warsh's defense of the inflation target, which has reduced a major drag on the currency and shifted focus back to economic fundamentals.

The euro edged up slightly to $1.1590, while sterling remained little changed at $1.3545. Both currencies are on track for their second consecutive monthly gains.