Dollar retreats as Fed hike bets fade and bond markets demand higher yields
The US dollar weakened against major currencies as softer economic data reduced expectations for a Federal Reserve rate hike, while mounting fiscal concerns and geopolitical tensions drove bond yields and crude prices higher.
The US dollar retreated in early Asian trading as investors scaled back bets on a near-term Federal Reserve interest rate increase. Softer US economic data, including a drop in July retail sales and recent job losses, has dampened the outlook for tighter monetary policy.
Market pricing now reflects only a 35% probability of a rate hike at the Fed’s September meeting, down sharply from 52.2% just a week ago, according to the CME FedWatch tool. This rapid repricing has provided immediate relief to major peers like the euro and sterling.
The euro traded at $1.1581, hovering near its two-month high of $1.1614 reached on Monday. Sterling also held firm at $1.3548, sitting just below its recent three-month peak.
Despite the softer dollar, inflation risks remain elevated due to geopolitical friction. Brent crude futures climbed 0.3% to $91.14 a barrel, supported by an impasse in U.S.-Iran conflict talks and the effective closure of the Strait of Hormuz.
Bond markets are simultaneously signaling deep apprehension about sovereign debt dynamics. The yield on the 30-year US Treasury bond hovered near its highest level in nearly two decades as investors digested recent multi-decade debt auctions.
Anthony Saglimbene, chief market strategist at Ameriprise Financial, highlighted the anxiety surrounding sovereign borrowing. "When it comes to longer-dated Treasury issuance, investors are increasingly focused and concerned about the growing amount of U.S. debt and America's lack of fiscal discipline," he said. Saglimbene added that frequent, large-scale Treasury auctions allow the bond market to push back against the government's eroding fiscal trajectory by demanding higher yields to clear.
In Asia, the Japanese yen remained pinned just below the 160 level, trading at 159.46 per dollar. This erases nearly half the gains achieved during the joint US and Japanese currency intervention at the end of July.
Attention is now shifting to the Bank of Japan’s meeting next month. Sources indicate the central bank is prepared to raise interest rates and is weighing a more aggressive hiking path thereafter. Reflecting this shift, the 10-year Japanese government bond yield recently hit its highest level since September 1996.
Commodity-linked currencies also found support amid the broader FX moves. The Australian dollar firmed 0.11% to $0.71119, nearing its strongest level since early June, while the New Zealand dollar held at $0.5902.
