The U.S. dollar remained under pressure on Monday even as expectations for another Federal Reserve interest-rate hike increased.
Renewed tensions in the Middle East and elevated oil prices have raised concerns about broader inflation pressures. That could encourage central banks around the world to maintain tighter monetary policy.
At the same time, renewed strength in the Japanese yen, rising U.S. government debt and uncertainty surrounding American economic policy weighed on the dollar.
U.S. Dollar Fails to Benefit From Strong Jobs Report
Currency markets were relatively quiet during early Asian trading because U.S. markets were closed for a holiday.
However, the dollar struggled to maintain the gains triggered by Friday’s stronger-than-expected U.S. employment report.
The euro edged higher to around $1.1618, while the British pound remained broadly unchanged near $1.3519.
Against a basket of major currencies, the U.S. Dollar Index slipped approximately 0.07% to 99.09.
That kept the index close to its recent low of 98.558.
Fed Rate Hike Expectations Rise
Markets increased expectations for another Federal Reserve rate hike following the latest nonfarm payrolls report.
Traders are now pricing in roughly a 57% probability of a rate increase this month.
Attention is therefore turning to Friday’s U.S. consumer price inflation report.
A stronger-than-expected inflation reading could significantly strengthen the case for a September Fed hike.
By contrast, softer inflation could encourage markets to price in a pause and potentially place additional pressure on the dollar.
Other Central Banks Limit Dollar Advantage
Even if the Federal Reserve raises interest rates, the dollar may struggle to achieve a major breakout if other central banks tighten policy at the same time.
Expectations for higher interest rates have also increased in Europe and Japan.
That reduces the potential interest-rate advantage of the United States compared with other major economies.
As a result, tighter Fed policy may provide less support for the dollar than it would if other central banks were moving in the opposite direction.
Oil Prices Increase Global Inflation Risks
Elevated oil prices are another important factor affecting central-bank expectations.
Higher energy costs could keep inflation pressures stronger across several major economies.
The European Central Bank is widely expected to raise its benchmark rate to 2.75%.
Markets are also pricing in roughly a 75% chance of another increase to 3% by December.
Bank of Japan Rate Hike Bets Support Yen
Investors are also becoming increasingly confident that the Bank of Japan will tighten monetary policy.
Markets are pricing approximately a 75% probability of a 25-basis-point BOJ rate hike at its September 18 meeting.
There is also around a 60% chance of another increase before the end of the year.
These expectations have helped strengthen the Japanese yen.
Japanese Yen Extends Strong Rally
The yen gained more than 0.2% on Monday to around 155.88 per dollar.
The move extended a strong rally from the previous week, when the Japanese currency advanced more than 2%.
Expectations for tighter Bank of Japan policy have been a major driver of the gains.
Comments from an economic adviser to Japanese Prime Minister Sanae Takaichi also reinforced expectations that the BOJ could raise interest rates this month.
Carry Trades Face Pressure From Stronger Yen
The yen’s rally could have wider consequences for global financial markets.
Investors have increasingly used the low-yielding Japanese currency to finance so-called carry trades, where funds are borrowed cheaply in yen and invested in higher-yielding assets elsewhere.
A sustained yen rally can make these strategies less attractive and potentially force investors to unwind existing positions.
Standard Chartered strategist Eric Robertsen warned that persistent yen strength could signal a broader shift in global asset allocation.
Australian and New Zealand Dollars Remain Stable
Elsewhere in currency markets, the Australian dollar gained approximately 0.12% to $0.7208.
The New Zealand dollar was little changed near $0.5880.
Overall currency-market movements remained limited as investors awaited fresh U.S. inflation data and upcoming central-bank decisions.
Bitcoin Holds Above $80,000
Bitcoin also remained relatively stable above the $80,000 level, trading near $80,146.
The cryptocurrency has recently benefited from some investors diversifying away from the U.S. dollar and into alternative assets.
For now, the U.S. dollar outlook remains heavily dependent on inflation data, Federal Reserve policy, oil prices and monetary-policy decisions from other major central banks.
