US Dollar Hike Expectations Plummet as Fed Hike Chances Fall

The US Dollar (USD) has seen its upside limited as markets scale back expectations of a September Federal Reserve (Fed) hike, according to OCBC's analysts. The softer July Producer Price Index (PPI) and lower US Treasury yields have contributed to this shift in market sentiment.

Markets now price around a 35% probability of a rate hike next month, down from about 55% before last week's labour market report. However, the risk of further tightening remains if upcoming inflation and employment data show limited progress on disinflation.

A broadly range-bound USD and a constructive risk backdrop continue to support carry trades, despite ongoing oil market volatility and persistent FX intervention risks for JPY. The main threat to this favourable environment is a further rise in long-term US yields driven by strong AI-related investment demand, persistent fiscal deficits, and continued resilience in US economic growth.