The U.S. dollar steadied on Tuesday, ending a multi-session decline and recovering from its lowest level since early June. Escalating military tensions in the Middle East overshadowed growing expectations that the Federal Reserve could keep interest rates unchanged in September.
The Dollar Spot Index traded around 99.65, slightly higher after falling to a multi-month low of 99.33 during the previous session.
Weak U.S. Data Keeps Fed Expectations Dovish
The dollar’s recovery came despite a series of weaker-than-expected U.S. economic indicators.
July nonfarm payrolls unexpectedly contracted, wholesale prices showed little growth, and retail sales declined 0.6%. The weaker data encouraged traders to increase bets that the Federal Reserve will leave interest rates unchanged at its September meeting.
Money markets were pricing in roughly a 65% probability of a Fed rate hold.
However, traders struggled to push the dollar significantly lower as renewed geopolitical tensions triggered another surge in energy prices and revived concerns about inflation.
Middle East Escalation Sends Oil Above $91
Brent crude climbed above $91 per barrel following renewed tensions between the United States and Iran.
The move came after a framework ceasefire expired and Tehran announced a shift toward a more aggressive military stance. At the same time, Washington raised the possibility of military action against Oman amid disputes involving Persian Gulf transit routes, according to Reuters.
The sharp rise in oil prices has complicated the outlook for global inflation and monetary policy. Higher energy costs could make it more difficult for central banks to ease policy even as economic growth slows.
That uncertainty has provided some support for the U.S. dollar.
Japanese Yen Slides Back Toward 160
The Japanese yen weakened around 0.2% on Tuesday, trading close to 160 against the dollar.
USD/JPY returned toward levels last seen on July 31, when the United States and Japan carried out their most recent joint currency intervention.
The latest decline suggests that the impact of official dollar-selling measures has largely faded.
Despite signals that Japan’s central bank could accelerate interest rate increases as early as September, yield differences between the United States and Japan continue to favor the dollar.
Persistent demand for carry trades has also added pressure on the yen.
Traders are now closely watching the psychologically important 160 level. A sustained move above that threshold could increase expectations of another intervention by Japanese or U.S. authorities.
Euro and Pound Retreat From Recent Highs
Other major currencies also lost momentum against the dollar.
The euro slipped from its highest level since June 17, trading broadly unchanged near $1.1500.
The British pound declined around 0.1% to $1.3490 after recently reaching its strongest level since May 5.
The moves highlight how rising geopolitical uncertainty has interrupted the recent weakness in the U.S. currency.
Indian Rupee Falls to Multi-Week Low
The Indian rupee came under heavier pressure, even as the broader dollar market stabilized.
USD/INR rose around 0.1% to 95.67, its highest level since July 30.
India is particularly vulnerable to rising energy prices because the country is a major oil importer. Higher crude prices can increase import costs and widen the country’s current account deficit.
At the same time, rising U.S. Treasury yields are increasing pressure on emerging-market currencies.
The U.S. 30-year Treasury yield climbed above 5.3%, reaching its highest level since 2007 and encouraging capital flows toward dollar-denominated assets.
RBI Continues to Defend the Rupee
The Reserve Bank of India has reportedly stepped up efforts to limit the rupee’s decline.
According to Reuters, the RBI was likely active in the spot foreign exchange market for an eighth consecutive session on Tuesday, selling dollars to reduce volatility and slow the currency’s depreciation.
The central bank has also introduced broader measures designed to limit speculative pressure.
On Monday, the RBI unexpectedly brought forward the deadline for commercial banks to use a discounted foreign-currency deposit swap facility. The new deadline was moved to August 31 after inflows through the program exceeded $50 billion.
However, strong dollar demand from domestic oil marketing companies continues to limit the effectiveness of the central bank’s intervention efforts.
Forex Traders Turn to Fed Minutes and Jackson Hole
Currency traders are now facing two competing forces.
Weak U.S. economic data is strengthening expectations for easier monetary policy, while rising oil prices and geopolitical tensions are increasing inflation risks.
Attention will therefore shift to the release of the Federal Reserve’s July FOMC meeting minutes on Wednesday and the upcoming Jackson Hole Symposium.
Investors will closely examine both events for clues about the direction of U.S. monetary policy.
The key question is whether policymakers are more concerned about weakening consumer demand and softer labor conditions or the renewed inflation threat caused by higher commodity and energy prices.
Until markets receive clearer guidance, volatility across the dollar, euro, yen and emerging-market currencies could remain elevated.
