Investing.com — The U.S. dollar on Monday recovered after earlier sliding to its lowest level in over two months, but remained in negative territory amid reduced expectations for imminent Federal Reserve interest rate hikes. Oil prices extended weekly gains, keeping inflation jitters on the table.
At 16:11 ET (20:11 GMT), the , which track the greenback against a basket of six major peers, slipped 0.1% to 99.58. It had hit a session low at 99.29 earlier, its lowest since June 2.
Fed minutes to provide more interest rate cues
Currency market participants are coming off a key week in which the economic calendar showed a moderation in annual consumer and producer inflation across both headline and core measures in July. Arriving after an unexpectedly weak July nonfarm payrolls report, and coupled with a soft retail sales reading on Friday, the data together suggests some breathing room for the Fed in terms of not immediately tightening policy.
Interest rate odds reacted accordingly. As per the CME FedWatch tool, the probability of the central bank holding rates steady in September stand at about 63%, while the chances of a quarter-point hike are at nearly 37%.
There will likely be some more insight into the central bank’s thinking later this week when the minutes of the Federal Open Market Committee’s (FOMC) July meeting will be published. Three regional Fed presidents had dissented with the FOMC’s move to hold rates steady, and watchers of monetary policy will be keen to see if there will be any more hawkish commentary in the minutes.
“The Minutes may reveal the exact reasons for the hawkish camp’s concerns, specifically what pushed the three dissenting members to vote for an immediate 25-basis-point rate hike in July,” Thierry Wizman, global FX and rates strategist at Macquarie, said.
“An argument based on restoring Fed credibility after many years of above-target inflation would sound hawkish insofar as it would mean that the ’hawkish’ sentiment will stay ’sticky’ within the FOMC. The participants’ discussions may also reveal the extent of concern around energy price-driven inflation,” he said.
“Importantly, the Minutes could outline what specific thresholds would force a majority of members to vote for monetary tightening, even if Warsh himself is reluctant to offer a ’reaction function’ for the Fed,” Wizman added.
Brent tops $90 a barrel
The dollar on Tuesday bounced off its session low in part due a boost to safe-haven demand amid rising oil prices, with , the global benchmark, topping $90 a barrel.
The advance came as the U.S. and Iran continued to remain at loggerheads over the Strait of Hormuz. Both sides have independently asserted control over the vital waterway, while Tehran has demanded that Washington fulfill conditions such as ceasing hostilities across all fronts and unfreezing Iranian assets before the chokepoint can be reopened.
Meanwhile, Iran has been working on a framework for management of the strait with Oman. Fox News on Monday quoted President Donald Trump as saying: “If Oman gets in the way, we’ll bomb the s— out of them.”
Monday also marks the expiration of the memorandum of understanding signed between the U.S. and Iran in mid-June, which effectively collapsed in July after the two sides exchanged tit-for-tat strikes over attacks on commercial ships in the strait. Trump told reporters that he would not be extending the agreement.
Yen slips after GDP miss
Turning to other major currencies, the Japanese yen weakened slightly on Monday, with the pair up 0.1% to 159.49. The yen has given up about roughly half of the gains it made against the dollar following a historic joint intervention by Washington and Tokyo at the end of July.
The easing in the yen also came after softer-than-expected domestic economic growth data. Official figures showed Japan’s economy expanded at an annualized rate of 1.1% in Q2, missing market forecasts of 2% and slowing from a revised 1.9% expansion in the prior quarter.
On a quarterly basis, GDP rose 0.3%, trailing expectations for 0.5% as weak private consumption and a contraction in capital expenditure dragged on output.
Rupee under pressure as RBI tightens defense rules
Elsewhere, the Indian rupee slipped, with the pair rising 0.4% as local importers scrambled for dollars amid sustained Middle East energy risks.
The rupee’s vulnerability came despite an aggressive, multi-front defense mounted by the Reserve Bank of India (RBI). To defend the currency against rapid depreciation, the central bank has regularly deployed spot market dollar sales alongside forex buy-sell swap operations.
In a surprise move on Monday, the RBI unexpectedly shortened the deadline for commercial banks to mobilize deposits under its discounted foreign-exchange swap facility for Foreign Currency Non-Resident [FCNR(B)] accounts, pulling the cutoff forward to August 31 from late September.
The central bank moved to wind down the window early after total forex inflows across FCNR(B) deposits, external commercial borrowings, and overseas borrowings surpassed an astonishing $56 billion, overloading bank liquidity channels.
By incentivizing foreign currency inflows and absorbing speculative rupee liquidity through strict bank exposure caps, the RBI has sought to limit structural volatility for USD/INR.
Ayushman Ojha and Pranav Kashyap contributed to this article
