The U.S. dollar recovered from earlier losses on Monday but remained lower overall as expectations for near-term Federal Reserve rate hikes declined. Rising oil prices also kept inflation concerns in focus.
At 16:11 ET (20:11 GMT), the U.S. dollar index, which measures the greenback against a basket of six major currencies, declined 0.1% to 99.58. The index had earlier fallen to 99.29, its lowest level since June 2.
Fed Minutes Could Provide Rate Outlook Clues
Currency markets are coming off a week of economic data showing moderation in U.S. consumer and producer inflation during July. Combined with weaker-than-expected July employment data and softer retail sales figures, the reports have reduced pressure on the Federal Reserve to tighten monetary policy immediately.
According to the CME FedWatch tool, markets are pricing in around a 63% probability that the Federal Reserve will keep rates unchanged in September, while the chance of a quarter-point increase stands near 37%.
Investors will look for further guidance later this week when minutes from the Federal Open Market Committee’s July meeting are released. Three regional Fed presidents dissented from the decision to keep rates unchanged, increasing interest in whether the minutes reveal additional support for tighter policy.
Thierry Wizman, global FX and rates strategist at Macquarie, said the minutes could provide insight into the concerns that led dissenting officials to support a 25-basis-point rate increase in July.
He noted that discussions could reveal whether officials remain focused on restoring Fed credibility after years of above-target inflation and how concerned policymakers are about energy-related inflation pressures.
Brent Crude Rises Above $90
The dollar received some support from safe-haven demand as oil prices increased, with Brent crude futures, the global benchmark, rising above $90 per barrel.
The move came as the U.S. and Iran remained at odds over control of the Strait of Hormuz. Both sides have claimed authority over the strategic waterway, while Tehran has demanded conditions including an end to hostilities and the release of frozen Iranian assets before reopening the route.
Iran has also been working on a framework for managing the strait with Oman. The U.S.-Iran memorandum of understanding signed in June expired Monday after relations deteriorated following strikes and attacks involving commercial vessels in the region.
Yen Weakens After Japan GDP Data
The Japanese yen weakened slightly, with USD/JPY rising 0.1% to 159.49. The currency has surrendered roughly half of the gains made after a joint intervention by U.S. and Japanese authorities at the end of July.
The yen came under pressure after weaker-than-expected economic growth data from Japan. The economy expanded at an annualized rate of 1.1% in the second quarter, below expectations of 2% and slower than the revised 1.9% growth in the previous quarter.
On a quarterly basis, GDP increased 0.3%, below forecasts of 0.5%, as weaker consumer spending and declining capital investment weighed on growth.
Indian Rupee Faces Pressure as RBI Adjusts Measures
The Indian rupee weakened, with USD/INR rising 0.4% as importers increased demand for dollars amid ongoing Middle East energy concerns.
The move came despite efforts by the Reserve Bank of India to support the currency through foreign exchange interventions, including dollar sales and swap operations.
The RBI also shortened the deadline for commercial banks to use its discounted foreign exchange swap facility for Foreign Currency Non-Resident (FCNR(B)) accounts, moving the cutoff to August 31 from late September.
The central bank said it moved to close the facility earlier after foreign exchange inflows from FCNR(B) deposits, external commercial borrowings and overseas borrowings exceeded $56 billion, creating pressure on bank liquidity channels.
By encouraging foreign currency inflows and limiting speculative rupee liquidity, the RBI has aimed to reduce volatility in USD/INR.
