Key facts
- The dollar held near a two-month high on Monday amid rising oil prices and hawkish Federal Reserve expectations.
- US President Donald Trump rejected a peace deal with Iran, contributing to oil price increases and concerns over the Strait of Hormuz.
- Traders are pricing in a 65% chance of a Federal Reserve rate hike at its upcoming meeting.
- Japan's service-sector inflation rose in August at its fastest annual pace in over two years.
- The Reserve Bank of Australia is anticipated to raise interest rates by 25 basis points to 4.60% on Tuesday.
The dollar remained near a two-month high on Monday, buoyed by rising oil prices stemming from US-Iran tensions and increasing bets on a hawkish stance from the Federal Reserve. Investors are closely watching upcoming economic data for further indications on inflation and central bank policy.
Brent crude futures climbed over 3% to surpass $107 a barrel after US President Donald Trump rejected a peace deal with Iran, raising concerns about potential disruptions to the Strait of Hormuz. This energy supply risk, coupled with robust US economic fundamentals, has fueled inflation worries and prompted traders to price in a higher probability of further interest rate hikes by the Federal Reserve. Markets currently estimate a 65% chance of a rate increase at the Fed's next meeting.
The euro weakened slightly to $1.1386, nearing two-month lows against the dollar and on track for a 2% decline in September. Sterling held steady at $1.3247, close to a three-month low, following comments from Bank of England Governor Andrew Bailey reiterating a warning about potential rate hikes. The dollar index, a measure against a basket of major currencies, eased to 101.12 but was still poised for its best monthly gain since June.
In Asia, the yen fell 0.3% to 157.7 per dollar, reversing some of Friday's gains. This move followed reaffirmations of cooperation between Japan's Finance Minister Satsuki Katayama and US Treasury Secretary Scott Bessent to address yen weakness. Data released on Monday indicated that Japan's service-sector inflation in August reached its fastest annual pace in over two years, suggesting mounting price pressures that could lead to faster rate hikes by the Bank of Japan.
The Australian dollar was trading at $0.70125, while the New Zealand dollar strengthened 0.1% to $0.5670. The Reserve Bank of Australia is widely expected to implement a 25 basis point interest rate hike on Tuesday, bringing the rate to 4.60%, which is anticipated to be the final increase in its current tightening cycle.
Sim Moh Siong, FX strategist at OCBC, noted that the dollar could potentially rise further in the short term if energy market tensions and inflation risks escalate. He added that OCBC's base case anticipates a moderate dollar rally towards the end of the year. Key economic data releases this week, including the US PCE Index and non-farm payrolls, are expected to support further policy tightening.