The US dollar experienced a slight decline on Monday but remained near its two-month high, driven by the ongoing confrontation between the United States and Iran, which has led to an increase in oil prices and bond yields. Investors are eagerly awaiting a busy week of data releases for additional insights into inflation and central bank policies. The dollar's performance is being closely watched as it approaches a potential 1.7% gain for the month, its strongest since June.
The euro saw a minor decline to 1.1386 dollars, staying close to its two-month low against the US dollar. It is headed for a 2% decrease in September. Meanwhile, the British pound stabilized at 1.3247 dollars, near its three-month low, after Bank of England Governor Andrew Bailey reiterated his warning of potential interest rate hikes. These movements reflect the cautious sentiment among investors as they assess the impact of global economic developments.
The dollar index, which measures the US currency against a basket of major currencies, edged down slightly to 101.12 points. However, it is on track for a 1.7% gain this month, its best performance since June. Oil prices surged over 3% on Monday, with Brent crude futures exceeding 107 dollars per barrel. This increase is attributed to US President Donald Trump's rejection of a peace agreement with Iran aimed at resolving the conflict and reopening the Strait of Hormuz.
The rise in oil prices and concerns over energy supply disruptions have heightened inflation fears. This has led traders to price in a more aggressive monetary policy stance by the US Federal Reserve. The ongoing increase in long-term US Treasury yields has further supported the dollar. According to Sim Moh Siong, a foreign exchange strategist at OCBC Bank, "The dollar may overshoot its fair value in the near term if energy market tensions persist and inflation risks escalate."
Sim Moh Siong added that his base-case scenario still involves a moderate dollar appreciation until the end of the year. Market attention is expected to shift to US data releases later in the week, including the Personal Consumption Expenditures index on Wednesday and non-farm payroll data on Friday. These releases are anticipated to be consistent with further monetary policy tightening. Currently, markets have priced in a 65% probability of a Federal Reserve interest rate hike at its next meeting in late October.
Other key data points this week include Chinese Purchasing Managers' Index figures on Wednesday and the Eurozone inflation data on Friday. The Japanese yen weakened by 0.3% to 157.7 yen against the dollar, trimming its gains from the previous day. This occurred after Japanese Finance Minister Satsuki Katayama and US Treasury Secretary Scott Piesent emphasized their commitment to addressing the yen's weakness through enhanced cooperation.
In other currency movements, the Australian dollar stood at 0.70125 dollars, while the New Zealand dollar rose by 0.1% to 0.5670 dollars. The Reserve Bank of Australia is expected to raise interest rates by 25 basis points to nearly 4.60%, a 15-year high, on Tuesday. This decision is likely to be part of its ongoing monetary policy tightening cycle. Meanwhile, the Chinese yuan strengthened slightly to 6.714 yuan against the dollar following a meeting between Trump and Chinese President Xi Jinping, which did not yield significant breakthroughs on several contentious issues.
Key points
- The US dollar remains near a two-month high due to ongoing US-Iran tensions and rising oil prices.
- Investors are awaiting key US data releases, including the Personal Consumption Expenditures index and non-farm payroll data.
- The Reserve Bank of Australia is expected to raise interest rates on Tuesday, contributing to the dollar's strength.
