Dollar feeble as rate hike bets dwindle, Iran war worries grow

SINGAPORE: The US dollar held near multi-month lows against most major currencies on Tuesday as traders ​walked back expectations of near-term monetary tightening, although the imminent threat of an escalation in the Middle East war left ‌sentiment fragile.

The euro fetched $1.1581 in early Asian hours, not far from the two-month high of $1.1614 it touched on Monday. Sterling was at $1.3548, just shy of the three-month peak it touched in the previous session.

Data showed last week that US retail sales fell in July for the first time in nine months, following unexpected ​job losses last month and mild inflation readings.

The run of softer data has led investors to scale back expectations ​of a rate hike by the US Federal Reserve.

Traders expect a 35% chance of a rate increase at ⁠the Fed’s September meeting, compared with 52.2% a week ago, according to the CME FedWatch tool.

Analysts though remain cautious of where inflation ​may head, especially with the critical Strait of Hormuz remaining effectively shut and an impasse in the talks to end the U.S.-Iran conflict.

“Inflation has been ​above target for most of the past five years, and whilst a high 2% annual pace may prove acceptable to the Fed, it leaves the inflation process with little to no breathing room in a world of constant supply shocks,” said Nohshad Shah, head of EMEA fixed income sales at Citadel Securities.

Iran said ​it would shift to a “fully offensive” military posture because efforts to negotiate a permanent end to the war with the U.S. have ​stalled, a senior Iranian official told Reuters as Washington ruled out extending their June ceasefire agreement.

Bond yields around the world were on the rise again as ‌traders remained ⁠wary of the impact of elevated oil prices and a prolonged closure of the Strait of Hormuz.

Brent crude futures were 0.3% higher at $91.14 a barrel after rising to their highest since July 30 on Monday.

The yield on the 30-year bond hovered near its highest level in nearly 20 years, while the 10-year JGB yield hit its highest level since September 1996.

The spotlight has also been on recent U.S. Treasury ​auctions in the past week for ​the multi-decade yields demanded by ⁠investors to absorb Washington’s borrowing needs.

“When it comes to longer-dated Treasury issuance, investors are increasingly focused and concerned about the growing amount of U.S. debt and America’s lack of fiscal discipline,” said Anthony Saglimbene, chief ​market strategist at Ameriprise Financial.

“Frequent, large-scale treasury auctions are a chance for the bond market to ​push back against the ⁠government’s eroding fiscal trajectory, as they demand higher yields for the auctions to clear.”

The yen was stuck just below the 160 level, shifting the focus to the Bank of Japan meeting next month, where the central bank is set to raise interest rates and is considering hiking more aggressively ⁠after that, ​sources told Reuters.

It was last at 159.46 per US dollar, having erased nearly half ​of the gains from the joint U.S. and Japan intervention at the end of July to lift the fragile yen away from 40-year lows.

The Australian dollar firmed 0.11% ​to $0.71119, perched near its strongest level since early June. The New Zealand dollar was at $0.5902.