- Yen Falls 0.84% as Dollar Strengthens Ahead of Crucial US Inflation Report
The US dollar strengthened on Monday as investors repositioned ahead of a closely watched inflation report that could determine whether the Federal Reserve has sufficient justification to raise interest rates at its September meeting.
The dollar index, which measures the greenback against a basket of major currencies including the euro and yen, rose 0.20% to 99.80, while the euro slipped 0.13% to US$1.1542. The move came after a substantially weaker-than-expected US jobs report reduced confidence that another increase in borrowing costs is imminent.
Fed funds futures were pricing a 52% probability of a September rate increase, down from 67% a week earlier. The shift illustrates how quickly expectations around US monetary policy are changing as investors attempt to reconcile weakening labour-market conditions with continuing inflation risks.
Attention is now focused on Wednesday’s US consumer price index report for July. A renewed acceleration in inflation could strengthen the argument for another rate increase, while softer price data would make it easier for investors to further reduce expectations of near-term monetary tightening.
That makes the inflation report particularly consequential for global markets. US interest-rate expectations influence not only Treasury yields but also the value of the dollar, capital flows into emerging markets, commodity prices and borrowing conditions across the global economy.
The dollar had been under pressure after Friday’s employment data and downward revisions to earlier jobs figures weakened the case for immediate tightening. Adam Button, chief currency analyst at investingLive, said expectations for a September move had looked increasingly strong before the labour-market report materially altered the outlook.
TD Securities analysts said fresh downward trends in the dollar were beginning to emerge following a series of negative catalysts, although they still expected the currency to remain comparatively supported against other major currencies until softer inflation data allowed markets to more decisively price out additional Fed tightening.
Oil prices have added another complication. Crude had eased from recent highs on expectations that diplomatic efforts could help end the Iran conflict and potentially reopen the Strait of Hormuz, but prices jumped more than 4.00% on Monday after Washington and Tehran exchanged demands for compensation, reducing optimism over an agreement.
Higher oil prices matter to the Fed because sustained increases can feed into transport, production and consumer costs, potentially slowing the decline in inflation. They can therefore strengthen the case for keeping monetary conditions restrictive even as employment indicators weaken.
That policy tension, weaker growth against renewed price pressure, increasingly defines the Federal Reserve’s challenge. Raising rates into a slowing labour market risks damaging activity further, while delaying action if inflation is reaccelerating could undermine progress made in stabilising prices.
The currency impact has been especially visible in Japan. The yen weakened 0.84% to 159.14 per dollar, putting it on course for its steepest daily decline against the US currency in almost five months.
The yen remains considerably stronger than the roughly 164-per-dollar multi-decade low reached late last month, following coordinated action by Japanese and US authorities aimed at supporting the currency. However, Monday’s move demonstrates that underlying pressure has not disappeared.
Positioning data point to another significant shift. Speculators reduced bearish bets against the yen by US$8.87 billion to US$3.60 billion in the week to August 4, the largest absolute reduction in net short positioning since March 2014. At the same time, speculative net-long positions in the dollar rose to their highest level since December 2022.
The Australian dollar also weakened 0.16% to US$0.7056 ahead of the Reserve Bank of Australia’s policy decision, with the central bank widely expected to maintain its benchmark rate at 4.35% through the remainder of the year.
For emerging economies, movements in the dollar carry broader consequences than the daily currency market suggests. A stronger greenback can increase the local-currency cost of servicing dollar-denominated debt and importing commodities, while encouraging global investors to favour US assets over riskier markets.
A weaker dollar can have the opposite effect, easing pressure on currencies and creating more room for central banks outside the United States to adjust domestic monetary policy. That is why Wednesday’s inflation reading will be watched well beyond Wall Street.
The immediate market question is whether the weak labour report represents the beginning of a sufficiently pronounced slowdown to prevent another Fed rate increase. The answer will depend partly on whether inflation data confirm that price pressures remain contained.
For now, investors remain caught between two competing signals: an employment market that appears to be weakening and energy prices capable of reigniting inflation concerns.
That uncertainty is supporting the dollar despite reduced expectations for a September rate increase. Wednesday’s CPI report could determine whether that support persists or whether the greenback resumes the downward move that had pushed it towards a two-month low.
