Amid growing market expectations of an interest rate hike, the dollar moved within a narrow range to settle near its highest level in two weeks.
This came after comments by the new Federal Reserve Chairman Kevin Warsh and renewed tensions in the Gulf region, while the yen struggled near the closely watched 160 level against the dollar.
Warsh said on Friday that the U.S. central bank would have work to do if policymakers were not convinced that inflation was heading toward 2 percent, in his clearest indication yet that further monetary tightening might be necessary to curb price pressures.
These comments reinforced bets on an interest rate hike in September. Markets raised the implied probability of such a move next month to 57 percent, while the yield on the benchmark two-year US Treasury note, which is sensitive to interest rate changes, held near its highest level in over a month at 4.33 percent.
Sim Moh Seong, a foreign exchange expert at OCBC Bank, said Warsh's defense of the inflation target eased one of the main factors that had been weighing on the US dollar and refocused attention on economic fundamentals, adding that it helped rebuild the Federal Reserve's credibility and eased concerns about currency erosion.
Economic data is awaited
Investors are now turning their attention to upcoming US economic data, particularly the non-farm payrolls report due on Friday and next week's consumer inflation figures, both of which could shape expectations ahead of the Federal Reserve meeting in September.
The euro rose by about 0.1 percent to $1.1590, while the pound was little changed at $1.3545. Both currencies remained on track for their second consecutive monthly gain.
The dollar index, which measures the performance of the US currency against six other major currencies, fell slightly to 99.6 points after jumping 0.6 percent on Friday to its strongest level since August 17.
However, the index is still on track to record a second consecutive monthly decline, as plans to repurchase US Treasury bonds earlier in the month revived bets on a currency devaluation.
Demand for the dollar was further boosted on Monday by renewed tensions in the Gulf and rising oil prices, as US forces launched an attack on Iran’s Larak Island on Sunday, the first known US raids on Iran since late July, while US President Donald Trump said in a social media post that Kharg Island, an energy hub in Iran, was being “leveled to the ground.”
The yen's weakness and the G20 meeting are under scrutiny.
Attention will turn to the meeting of G20 finance ministers and central bank governors hosted by the United States on Monday and Tuesday. Markets will be watching for any signs of a coordinated effort to sever ties with Iran, as well as measures aimed at calming concerns about rising US debt and bond yields.
The continued weakness of the yen also remains a concern, as the dollar's return to strength adds further pressure on the Japanese currency, after it shed much of the gains it made following official intervention in July.
The yen found some support and rose slightly to 159.78 against the dollar after falling to over 160 against the dollar on Friday, a level widely seen as increasing the risk of official intervention and bringing back into focus whether Tokyo and Washington might step in again to prop up the currency.
U.S. Treasury Secretary Scott Bisent said on Sunday that the latest moves in the yen's exchange rate remained largely under control, adding that he expected Bank of Japan Governor Kazuo Ueda to do the right thing with regard to monetary policy.
Carlos Casanova, UBP's chief Asia economist, said that historically, interventions have only succeeded when the underlying factors (of the economy) have moved in the same direction, according to Reuters.
He added that the yen remains under pressure due to the wide interest rate gap, negative real interest rates, and the Bank of Japan's cautious pace.
On the other hand, the Chinese yuan rose to 6.72 against the dollar after data showed improved factory activity in the country during August, despite its continued contraction.
The New Zealand dollar held near a three-month high of $0.5918 as traders braced for an expected interest rate hike in the country this week. The Australian dollar rose 0.1 percent to $0.7165.
These comments reinforced bets on an interest rate hike in September. Markets raised the implied probability of such a move next month to 57 percent, while the yield on the benchmark two-year US Treasury note, which is sensitive to interest rate changes, held near its highest level in over a month at 4.33 percent.
Sim Moh Seong, a foreign exchange expert at OCBC Bank, said Warsh's defense of the inflation target eased one of the main factors that had been weighing on the US dollar and refocused attention on economic fundamentals, adding that it helped rebuild the Federal Reserve's credibility and eased concerns about currency erosion.
Economic data is awaited
Investors are now turning their attention to upcoming US economic data, particularly the non-farm payrolls report due on Friday and next week's consumer inflation figures, both of which could shape expectations ahead of the Federal Reserve meeting in September.
The euro rose by about 0.1 percent to $1.1590, while the pound was little changed at $1.3545. Both currencies remained on track for their second consecutive monthly gain.
The dollar index, which measures the performance of the US currency against six other major currencies, fell slightly to 99.6 points after jumping 0.6 percent on Friday to its strongest level since August 17.
However, the index is still on track to record a second consecutive monthly decline, as plans to repurchase US Treasury bonds earlier in the month revived bets on a currency devaluation.
Demand for the dollar was further boosted on Monday by renewed tensions in the Gulf and rising oil prices, as US forces launched an attack on Iran’s Larak Island on Sunday, the first known US raids on Iran since late July, while US President Donald Trump said in a social media post that Kharg Island, an energy hub in Iran, was being “leveled to the ground.”
The yen's weakness and the G20 meeting are under scrutiny.
Attention will turn to the meeting of G20 finance ministers and central bank governors hosted by the United States on Monday and Tuesday. Markets will be watching for any signs of a coordinated effort to sever ties with Iran, as well as measures aimed at calming concerns about rising US debt and bond yields.
The continued weakness of the yen also remains a concern, as the dollar's return to strength adds further pressure on the Japanese currency, after it shed much of the gains it made following official intervention in July.
The yen found some support and rose slightly to 159.78 against the dollar after falling to over 160 against the dollar on Friday, a level widely seen as increasing the risk of official intervention and bringing back into focus whether Tokyo and Washington might step in again to prop up the currency.
U.S. Treasury Secretary Scott Bisent said on Sunday that the latest moves in the yen's exchange rate remained largely under control, adding that he expected Bank of Japan Governor Kazuo Ueda to do the right thing with regard to monetary policy.
Carlos Casanova, chief economist for Asia at UBP, said that historically, interventions have only succeeded when the underlying factors (of the economy) have moved in the same direction, according to Reuters.
He added that the yen remains under pressure due to the wide interest rate gap, negative real interest rates, and the Bank of Japan's cautious pace.
On the other hand, the Chinese yuan rose to 6.72 against the dollar after data showed improved factory activity in the country during August, despite its continued contraction.
The New Zealand dollar held near a three-month high of $0.5918 as traders braced for an expected interest rate hike in the country this week. The Australian dollar rose 0.1 percent to $0.7165.
