Markets price 57% chance of September Fed hike, but expectations of tightening by ECB and BOJ limit dollar’s yield advantage
SINGAPORE: The US dollar struggled for direction on Monday despite growing expectations of a Federal Reserve rate hike this month, as elevated oil prices and Middle East tensions strengthened the case for monetary tightening by other major central banks.
Currency movements were subdued during Asian trading with US markets closed for a holiday, while the dollar failed to sustain gains triggered by Friday’s stronger-than-expected US employment report.
Against a basket of major currencies, the dollar was largely unchanged at 99.16, remaining close to its recent low of 98.558. The euro was little changed at $1.1609, while sterling edged lower to $1.3513.
Traders are now pricing in around a 57% probability that the Federal Reserve will raise interest rates in September following the strong nonfarm payrolls report. Attention has shifted to US inflation data due on Friday, which could determine the Fed’s next move.
“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.
However, the prospect of higher US rates has provided limited support to the dollar because rising oil prices are also adding to inflation pressures elsewhere, increasing expectations that other major central banks will tighten policy.
The European Central Bank is widely expected to raise rates to 2.75% on Thursday, while futures imply a 75% probability of another increase to 3% by December.
Markets are similarly pricing in a 75% chance that the Bank of Japan will raise rates by 25 basis points at its September 18 meeting, alongside a 60% probability of another increase by December.
The prospect of simultaneous tightening reduces the relative interest-rate advantage that would normally support the dollar. Concerns over rising US debt and policy uncertainty have also weighed on the currency.
The Japanese yen gained 0.1% to 156.01 per dollar after an economic adviser to Japanese Prime Minister Sanae Takaichi projected a BOJ rate hike this month.
The yen had strengthened more than 2% last week amid an unwinding of carry trades and expectations that Japanese investors could repatriate capital.
Elsewhere, the Australian dollar gained 0.11% to $0.7207, while the New Zealand dollar slipped 0.1% to $0.5875.
Bitcoin was little changed around $80,000, last trading at $79,841.85, after recently drawing support as some investors diversified away from the dollar.
