US Dollar Mixed as Markets Scale Back Rate Hike Expectations
The US Dollar's performance has been mixed in recent overnight trading sessions, despite lower US Treasury yields. This is largely due to the softer-than-expected July Producer Price Index (PPI) release, which has reinforced expectations that the Federal Reserve will remain on hold in September.
Markets now price around a 35% probability of a rate hike next month, down from about 55% before last week's labor market report. However, the risk of further tightening remains if upcoming inflation and employment data show limited progress on disinflation.
A broadly range-bound US Dollar and a constructive risk backdrop should continue to support carry trades, despite ongoing oil market volatility and persistent FX intervention risks for JPY. The main threat to this favorable 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.