Dollar Holds Range-Bound as Markets Price in Dovish Federal Reserve Response
Market Reactions and Economic Data Impact on the U.S. Dollar
By Chibuike Oguh and Harry Robertson
NEW YORK/LONDON, Aug 18 (Reuters) - The U.S. dollar was trading range-bound against major peers on Tuesday as markets continued pricing in a dovish response from the Federal Reserve in the wake of softer economic data.
Currency Movements and Fed Expectations
The euro eased from two-month highs of $1.161 touched on Monday and was last up 0.03% at $1.15760.
Data in the past few weeks have pointed to a softer U.S. economy, including unexpected job losses last month and mild inflation readings, leading investors to scale back expectations of an interest rate hike by the U.S. Federal Reserve.
Market pricing for a September quarter-point hike flipped toward a near-70% chance of a hold, after recent news of unexpected job losses in July and other economic data.
Market Interpretation of Fed Policy
"Current levels, particularly dollar-denominated pairs, are just reflecting the surprised dovishness we saw in the last Fed meeting or at least the interpretation of dovishness," said Eugene Epstein, head of structured products for Moneycorp North America in Stamford, Connecticut.
"Leading up to the last Fed decision, Chair Kevin Warsh appeared to be a hawk. But now it appears not to be the case or at least that's not something the market is interpreting at this point. Combine that the data we've seen in terms of CPI, which did not imply inflation, and the last jobs number did not imply inflation as well. So suddenly, you have the dollar weakening and that is reflective across most currency pairs," he added.
Performance Against Other Currencies
The dollar was 0.17% higher against the Swiss franc at 0.81230.
Sterling was down 0.04% against the dollar at $1.35356, just shy of the three-month peak it hit in the previous session.
"Benign inflation and signs of softness in the US labour market make a September Fed hike highly unlikely at this point—despite the modest firming in Fed expectations this morning," said Scotiabank analysts led by Shaun Osborne in an investor note. "Short-term USD gains remain a fade from our point of view."
Inflation Fallout and Geopolitical Factors
Impact of U.S.-Japan Intervention and Global Tensions
INFLATION FALLOUT
Joint U.S. and Japanese intervention to strengthen the yen in late July has also weighed on the dollar more broadly.
Analysts remain cautious about where inflation may head, with the critical Strait of Hormuz remaining effectively shut and the U.S.-Iran conflict simmering.
Inflation Concerns Amid Global Uncertainty
"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 have stalled, a senior Iranian official told Reuters as Washington ruled out extending their June ceasefire agreement.
The more than five-month-long conflict has stoked inflationary concerns and upended the global interest rate outlook.
Bond Yields and Commodity Prices
Bond yields around the world were on the rise again, partly due to traders' concerns about the impact on energy prices of a prolonged closure of the Strait of Hormuz. [US/]
U.S. 30-year Treasury yields rose to their highest level since 2007, while yields around the world moved higher. Yields move inversely to prices.
Brent crude futures held steady to settle at $91.02 a barrel, up 0.17%, marking their firmest levels since July 24. [O/R]
Asian Currencies and Dollar Index
Japanese Yen and Central Bank Policy
The Japanese yen was 0.08% weaker at 159.605 per dollar, having erased nearly half of the gains from the joint U.S. and Japanese intervention at the end of July to lift the fragile yen away from a 40-year low of 163.99.
Traders are focused on the threat of more intervention as well as the Bank of Japan meeting next month, where the central bank is expected to raise interest rates.
Dollar Index and Other Major Currencies
The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, rose 0.09% to 99.63.
The Australian dollar weakened 0.26% versus the greenback to $0.70860.
The dollar strengthened 0.07% to 6.747 versus the offshore Chinese yuan.
(Reporting by Chibuike Oguh in New York and Harry Robertson in London; Editing by Hugh Lawson and Lisa Shumaker)
