The U.S. dollar fell to its lowest level since early June as a wave of softer economic data pushed markets to price a 70% chance that the Federal Reserve will keep interest rates unchanged at its September meeting.
The Dollar Spot Index dropped 0.3% to 99.33, a level not seen since June 5. The decline came after July nonfarm payrolls contracted, retail sales fell 0.6%, and both the Consumer Price Index and Producer Price Index came in flat or on target. That combination removed the near-term case for further rate hikes. Money markets now assign a 70% probability to a Fed pause, a sharp reversal from before the August 7 payrolls report, when odds of a hike were above 50%.
The euro climbed to a two-month high of $1.1614, while sterling reached a three-month high of $1.3571 as rate expectations shifted away from the dollar. Fed Chair Kevin Warsh has avoided giving forward guidance, leaving markets highly sensitive to each economic release. Commerzbank analyst Volkmar Baur said the dollar could fall further if markets continue to trim rate hike bets, and his bank expects three Fed rate cuts next year.
Traders are now watching Wednesday’s release of the July Federal Open Market Committee meeting minutes. The Fed held rates at 3.5% to 3.75% for the fifth straight time in July. The Jackson Hole Symposium is seen as the next major event for Fed policy signals.
The Japanese yen traded near 159.00 per dollar, supported by reports that the Bank of Japan may raise rates as early as September despite Japan’s economy growing at an annualized 1.1% in the second quarter, below the 2% forecast. The Indian rupee faced pressure as local importers bought dollars, while the Reserve Bank of India shortened the deadline for banks to mobilize deposits under its foreign-exchange swap facility after inflows exceeded $56 billion.
Brent crude stayed near $89 a barrel as Persian Gulf tensions continued, keeping pressure on energy-importing emerging market currencies and limiting a broader dollar selloff.
