The U.S. dollar weakened slightly on Monday as softer economic data reduced expectations for another near-term Federal Reserve interest rate increase. At the same time, the Japanese yen strengthened modestly despite disappointing second-quarter growth figures from Japan.
The U.S. Dollar Index fell 0.2% to 99.47, extending Friday’s 0.3% decline as investors reassessed the outlook for U.S. monetary policy.
Softer U.S. Data Reduces Fed Rate Hike Expectations
Recent U.S. economic reports have pointed to weaker momentum, prompting traders to scale back expectations for additional Federal Reserve tightening this year.
Employment data, along with consumer and producer inflation figures, have suggested that economic pressures are beginning to cool.
According to interest-rate futures, markets are pricing in roughly a 70% probability that the Federal Reserve will leave rates unchanged at its September meeting.
The shift in expectations has reduced support for the U.S. dollar, which typically benefits when investors anticipate higher interest rates.
Fed Minutes and Jackson Hole in Focus
Investors are now looking ahead to the release of the Federal Reserve’s July meeting minutes on Wednesday for more information about policymakers’ views on inflation, economic growth and future interest-rate decisions.
Attention will then turn to the Jackson Hole economic symposium later this month.
Comments from Federal Reserve officials at the event could provide additional guidance on whether policymakers are preparing to keep rates unchanged or consider further tightening.
Japanese Yen Gains Despite Weak GDP Data
The Japanese yen strengthened modestly against the dollar, with USD/JPY falling around 0.2% to near 159 yen.
The currency gained even after new economic data showed that Japan’s economy expanded more slowly than analysts had expected during the second quarter.
Japan’s gross domestic product grew at an annualized rate of 1.1%, significantly below market expectations for 2.0% growth.
The previous quarter’s growth rate was revised to 1.9%.
On a quarter-over-quarter basis, the economy expanded 0.3%, also missing forecasts for a 0.5% increase.
Weak Consumption Weighs on Japan’s Economy
Japan’s weaker GDP performance reflected disappointing private consumption and declining capital investment.
Household spending remained subdued, while businesses reduced capital expenditure during the quarter.
However, exports provided some support to the economy.
Demand for Japanese hybrid vehicles remained resilient, while continued global investment in semiconductor and technology infrastructure supported exports of related equipment.
The mixed economic picture leaves investors assessing how the latest data could influence the Bank of Japan’s monetary policy outlook.
Chinese Yuan Holds Steady
Elsewhere in Asian currency markets, the Chinese yuan showed little movement.
The onshore USD/CNY pair traded broadly flat, reflecting relatively subdued trading conditions.
Meanwhile, the Australian dollar strengthened, with AUD/USD rising around 0.2% against the weaker U.S. currency.
Indian Rupee Faces Pressure
The Indian rupee moved in the opposite direction despite the broader decline in the dollar.
The USD/INR pair gained around 0.2% after the Reserve Bank of India unexpectedly shortened the deadline for banks to use a discounted foreign-exchange swap facility involving non-resident deposits.
The decision followed more than $50 billion in inflows through the facility.
The change added pressure on the rupee even as the dollar weakened against several other major currencies.
Middle East Tensions Remain a Market Risk
Geopolitical uncertainty in the Middle East also continued to influence foreign-exchange markets.
Expectations for an agreement between the United States and Iran to reopen the Strait of Hormuz have weakened, while tanker traffic through the strategically important waterway has declined sharply.
Iranian Foreign Minister Abbas Araqchi said Tehran had not yet decided whether to resume negotiations with Washington.
Meanwhile, U.S. President Donald Trump acknowledged that higher gasoline prices could persist as the conflict continues.
Persistent uncertainty around the Strait of Hormuz remains important for currency markets because disruptions to global oil supplies could raise energy prices and revive inflation concerns.
Dollar Outlook Hinges on Fed Policy
The near-term direction of the U.S. dollar is likely to depend heavily on upcoming Federal Reserve signals.
Further evidence of weaker economic growth or cooling inflation could strengthen expectations that rates will remain unchanged, potentially putting additional pressure on the dollar.
However, renewed inflation concerns or unexpectedly hawkish comments from policymakers could quickly revive expectations for further tightening.
For now, the dollar remains under mild pressure while the yen holds firm, as investors weigh softer U.S. economic data against weaker Japanese growth and persistent geopolitical risks.
