The US dollar remained largely steady on Monday while the yen held close to a seven-month high as investors positioned for possible interest rate hikes from the US Federal Reserve and Bank of Japan this week.
Markets have increased their expectations for a Fed rate hike after US consumer prices accelerated in August. The CME FedWatch tool showed an 86% probability of a rate increase this week, with another move expected later in the year.
The Fed is due to announce its decision on Wednesday, followed by the Bank of Japan on Friday. The Bank of England is expected to leave rates unchanged on Thursday.
The shifting rate outlook has pushed US Treasury yields higher, with the two-year yield easing slightly to 4.6148% after rising 26 basis points last week. However, higher yields have yet to provide much support for the dollar as other major central banks are also expected to tighten policy.
The dollar index was steady at 99.15 after two consecutive weeks of modest declines. The euro was at US$1.159 while sterling was trading at US$1.3524.
Meanwhile, the yen stood at 153.49 per US dollar, close to the seven-month high of 152.89 reached last week. The Japanese currency has gained about 4% this month as markets anticipate a faster pace of BOJ rate hikes and signs of increased demand for the yen emerge.
MUFG analysts said a 25-basis-point BOJ hike was already almost fully priced in.
“For the yen to strengthen further, the BOJ will have to signal that they are planning to stick to the faster pace of hikes,” the analysts said.
TD Securities warned that failing to put another rate hike on the table for either the October or December meeting could trigger a sharp rebound in the dollar against the yen towards 157 to 160.
Meanwhile, oil prices continued to add pressure to the global inflation outlook. Brent crude futures rose nearly 3% to US$107.51 a barrel in early Asian trading following fresh Houthi strikes on Saudi Arabia and Iranian attacks on ships in the Gulf, compounded by the closure of a key Saudi oil pipeline.
AMP chief economist and head of investment strategy Shane Oliver said the Fed could still wait, although delaying action until December would present challenges given the timing of the October meeting and US midterm elections.
“The Fed could decide to wait, but that is complicated by its October meeting being just ahead of the U.S. midterm elections and waiting until December to move will be too long,” he said.
Reuters
