The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, edged up 0.03% to 101.55, with the euro down 0.01% at $1.1366. Against the Japanese yen, the dollar gained 0.05% to 163.82, while sterling eased 0.02% to $1.3284.
Although a pause in U.S. attacks on Iran pushed oil prices lower and somewhat eased inflation worries, U.S. Treasury yields retreated only modestly compared with moves in other markets overnight.
“The lack of meaningful buying at the front end of the Treasury curve has helped keep the U.S. dollar well supported,” said Chris Weston, head of research at Pepperstone.
The Fed will hold a two-day policy meeting ending on Wednesday. A growing number of major brokerages believe there is a real risk of the Fed delivering a rate hike this week, given the surge in oil prices during the month and the escalation in tensions in the Middle East.
Expectations for a rate hike of at least 25 basis points from the Fed at its policy announcement are pegged at 36.3%, according to CME FedWatch, up from 16% a week ago. Markets are pricing in an 81% chance for a hike at the central bank’s September meeting.
“If we do get a surprise hike, surely that’s going to lend support to the dollar, probably going to see new highs and probably sustain the level of strength on the dollar especially against the lower yielders, which are Japanese yen and Swiss franc,” said Mahjabeen Zaman, head of FX research at ANZ Bank, in a podcast. Investors will also look to U.S. second-quarter GDP data and the Fed’s preferred inflation gauge, core PCE inflation, this week for more clues on the health of the world’s biggest economy.
PACKED CENTRAL BANK WEEK
The Bank of England and Bank of Japan are widely expected to keep interest rates unchanged at their meetings on Thursday and Friday, respectively, while maintaining a cautious stance on inflation.
With the yen pinned near last week’s 40-year lows against the dollar, the BOJ is expected to leave the door open to further hikes to stem the currency’s decline, although policymakers will likely stay ambiguous on the pace and timing of the moves. Verbal efforts to support the Japanese currency have so far yielded muted results.
“With no change in rates expected, we think that the BOJ will need to strike a fairly hawkish note in order to make clear to markets that it is credible in its attempts to both achieve its inflation mandate and support the yen,” said Matthew Ryan, head of market strategy at global financial services firm Ebury.
In other major currencies, the Australian dollar weakened 0.11% versus the greenback to $0.6981, while New Zealand’s kiwi lost 0.12% to $0.5766.
In cryptocurrencies, bitcoin fell 1.88% to $63,694.59. Ether declined 2.83% to $1,890.30.
