Dollar Weakens Amid Fiscal Doubts and Rising Japanese Inflation

The US dollar has weakened as investors focus on potential US Treasury measures to stem the decline in Treasury yields, according to MUFG's Derek Halpenny.

Japanese inflation data supports expectations for a 25bp Bank of Japan rate hike in September, with nationwide CPI data for July revealing a rebound back toward the 2.0% level, and core-core CPI rate jumping to 1.9%.

The US Treasury's plans to announce an increased focus on fiscal consolidation have been met with skepticism by market participants, including Halpenny, who notes that 'a US fiscal initiative that lacks credibility won't help UST bonds or the dollar'.

As a result, Halpenny remains sceptical that the US will deliver credible fiscal consolidation and sees limited scope for further EUR/USD upside in the near term.