Dollar retreats despite elevated September Fed hike bets

Dollar slides even as Fed hike bets increase

The US dollar pulled back on Monday against most of its major peers, despite rebounding strongly on Friday amid hawkish remarks by Fed Chair Warsh at the Jackson Hole economic symposium.

At his first speech at the annual conference of the Kansas City Fed, the new Fed chief said that underlying inflation trends have not “meaningfully improved”, adding that he and his colleagues remain ready to act in accordance with their price stability mandate.

This took the probability of a September rate hike above 50%, with the renewed military hostilities between the US and Iran taking it even higher, to 65%.

Debasement trade slows, but not over

Oil prices opened the week with a positive gap and extended their rally, with WTI crude oil emerging above $87.00. This sparked fresh inflation fears, sending Treasury yields higher and weighing on equities.

Still the dollar did not capitalize on the renewed inflation concerns and the increasing rate hike bets. This may have been due to investors remaining concerned about the fiscal outlook of the world’s largest economy. Despite the US Treasury announcing an increase in long-dated bond buybacks, investors remained unwilling to fund a ballooning beyond-$40tn debt, allowing yields to resume their rally.

Thus, the debasement trade may still be ongoing, despite slowing down, with investors reconsidering the assets they could use as safe havens amid escalation in the Middle East. Indeed, gold and Bitcoin were slightly higher yesterday, though they are pulling back again today.

Attention today is likely to turn to the ISM manufacturing PMI for August and the JOLTs job openings for July as Friday’s agenda includes the all-important NFP report for last month. Solid prints, including rising employment and prices ISM subindices could further strengthen the likelihood of a September rate hike, providing the dollar another opportunity for rebounding.

Yen stays close to 160.00 amid Bessent’s BoJ hike remarks

The yen also took advantage of the dollar’s weakness yesterday, with dollar/yen returning below the psychological zone of 160.00 after briefly breaching it. Yet, the pair is on the rise again, despite US Treasury Secretary Scott Bessent increasing pressure on the Bank of Japan to shift the rate-hike gear higher and arguing that the government should adjust its strategy in a way that leads to a stronger currency.

Nonetheless, with Japanese Prime Minister Takaichi insisting on her massive fiscal plans and having the ability to influence the dynamics within the BoJ, through her Board appointments, it may be hard to envision a case where the Bank turns more hawkish, signaling rate hikes at a more aggressive than expected pace.

Wall Street feels the heat of rising yields and geopolitics

On Wall Street, all three of its major indices closed Monday in the red, with the Dow Jones losing the most ground. Renewed tensions in the Middle East, rising oil prices, and intensified Fed hike bets, constitute a blend that is negatively impacting stocks.

However, with the tech-heavy Nasdaq losing the least, it appears that AI enthusiasts have not given up. Following Nvidia’s latest astounding results and revenue outlook, expectations of sustained demand for AI chips may have been bolstered. Focus this week turns to Broadcom’s earnings, scheduled for Wednesday afternoon. Investors may seek more information regarding AI spending and chip demand.