Dollar Takes Hit as Rate Hike Expectations Rise Amid Inflation Fears

The dollar has taken a hit despite increased expectations of a rate hike by the Federal Reserve. Middle East tensions have fueled inflation fears, leading to a boost in bets that central banks will tighten policy. This shift in sentiment, combined with yen strength and concerns over U.S. debt, has put pressure on the greenback.

The dollar struggled to maintain its earlier gains, which were sparked by last week's strong jobs report. The euro is up marginally at $1.1618, while sterling remains little changed at $1.3519. Against a basket of currencies, the dollar fell 0.07% to 99.09.

Traders are now pricing in a roughly 57% chance that the Federal Reserve will hike rates this month, following last week's nonfarm payrolls release. A hot inflation reading would all but seal a September rate hike and support a firmer U.S. dollar, while a cooler reading would strengthen the case for a hold and leave the dollar vulnerable to a dovish Fed repricing.

Other central banks are also expected to tighten policy in response to rising oil prices and inflationary pressures. The European Central Bank is seen lifting rates to 2.75% on Thursday, while markets price a 75% chance of another hike to 3.0% by December.