Dollar gets little lift from boost in Fed hike expectations

SINGAPORE: The dollar was on shaky ground on ​Monday, despite a ramp-up in US rate hike bets as Middle East tensions raised the prospect of broader inflationary pressures ‌that could force global central banks to tighten policy in tandem.

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

Moves in currencies were largely subdued in early Asia trade with US 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 marginally at $1.1618, while sterling was little changed at $1.3519. Against a basket of currencies, the dollar ⁠fell 0.07% to 99.09, not far from its recent low of 98.558.

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 US dollar. A cooler reading would strengthen the case for a hold and leave the US 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 US dollar will make new cyclical ​highs. Tightening by other major central banks limits policy divergence.”

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.

Change in tide

The yen rose more than 0.2% to 155.88 per ​dollar on Monday, extending gains ​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.

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.

In other currencies, the Australian dollar advanced 0.12% to $0.7208, while the New Zealand dollar was flat at $0.5880.

Bitcoin steadied above the $80,000 level and was last at $80,145.95, ​having drawn support recently as investors diversified away from the dollar into other assets.