Dollar Struggles Despite Rising Fed Rate Hike Expectations

Dollar Falters as Global Inflation and Fed Hike Bets Jostle Currency Markets

Currency Markets React to Inflation and Central Bank Policies

By Rae Wee

Dollar Struggles Amid Global Rate Hike Expectations

SINGAPORE, Sept 7 (Reuters) – The dollar wobbled on Monday despite a ramp-up in U.S. rate-hike bets, as tension in the Middle East heightened inflation risks that could force global central banks to tighten policy in tandem, eroding the U.S. yield advantage.

A shift in sentiment towards the Japanese yen and worries about ever-growing U.S. debt and policy uncertainties also weighed on the greenback.

Moves in currencies were largely subdued in Asia trade with U.S. markets closed for a holiday, though the dollar struggled to sustain a brief lift it received from Friday’s blowout U.S. jobs report.

The euro was up little changed at $1.1609, while sterling eased a touch to $1.3513. Against a basket of currencies, the dollar was flat at 99.16, not far from its recent low of 98.558.

Federal Reserve Rate Hike Bets and Market Sentiment

Traders moved to price in a roughly 57% chance the Federal Reserve will hike rates this month in the wake of the nonfarm payrolls release, with much now depending on Friday’s inflation data.

“A hot CPI print would all but seal a September hike and underpin a firmer U.S. dollar. A cooler reading would strengthen the case for a hold and leave the U.S. dollar vulnerable to a dovish Fed repricing,” said Elias Haddad, global head of markets strategy at BBH.

“Even if a September Fed hike becomes a done deal, we doubt the U.S. dollar will make new cyclical highs. Tightening by other major central banks limits policy divergence.”

Global Central Bank Moves and Inflationary Pressures

The inflationary impulse from still-elevated oil prices is a major reason the European Central Bank is seen certain to lift rates to 2.75% on Thursday. Futures also imply a 75% chance of another hike to 3.0% by December. 

Likewise, markets are pricing a 75% chance the Bank of Japan (BOJ) will raise rates a quarter point at its meeting on September 18, with a 60% probability of another move by December.

Japanese Yen Strength and Market Implications

Change in Tide for the Yen

CHANGE IN TIDE

The yen rose 0.1% to 156.01 per dollar on Monday, drawing additional support after Japanese Prime Minister Sanae Takaichi’s economic adviser projected a BOJ hike this month.

The Japanese currency had surged more than 2% last week, following a confluence of factors including the unwinding of carry trades and expectations of capital repatriation that would boost the yen.

Carry Trades and Asset Allocation Shifts

Eric Robertsen, global head of research and chief strategist at Standard Chartered, said that while carry trades have been among the strongest macro performers year-to-date despite a surge in borrowing costs globally, the “recent burst” of yen strength is a “potential threat to carry outperformance”.

“If the JPY were to strengthen persistently, this may signal that the increase in JPY and USD rates is starting to trigger a change in asset allocation,” he said.

Other Currencies and Market Movements

Australian and New Zealand Dollar Trends

In other currencies, the Australian dollar advanced 0.11% to $0.7207, while the New Zealand dollar slipped 0.1% to $0.5875.

Bitcoin and Diversification Away from the Dollar

Bitcoin steadied around the $80,000 level and was last at $79,841.85, having drawn support recently as investors diversified away from the dollar.

(Reporting by Rae Wee; Editing by Stephen Coates)