By Jiaxing Li
HONG KONG, Aug 31 (Reuters) – The dollar held steady near a two-week high on Monday as markets ramped up bets on a rate hike after hawkish remarks from Federal Reserve Chair Kevin Warsh and renewed Gulf tensions, while the yen struggled near the closely watched 160-per-dollar level.
The U.S. central bank will “have work to do” if policymakers do not get the confidence they need that inflation is heading down to 2%, Warsh said on Friday, in his clearest indication yet that further tightening may be needed to curb price pressure.
The comments fuelled bets on a September rate hike. Markets raised the implied probability of a move next month to 57%, while yields on interest-rate-sensitive 2-year U.S. Treasury notes held near a more than one-month high of 4.33%.
“Warsh’s defense of the inflation target has reduced a major drag on the U.S. dollar and shifted the focus back to economic fundamentals,” said OCBC’s FX strategist Sim Moh Siong, adding that it helped rebuild the Fed’s credibility and eased concerns about currency debasement.
Investors are now turning their focus to incoming U.S. data, particularly Friday’s nonfarm payrolls report and next week’s consumer inflation figures, both of which could shape expectations ahead of the September Fed meeting.
The euro edged up roughly 0.1% to $1.1590, while sterling was little changed at $1.3545. Both currencies remained on track for their second consecutive monthly gains.
The dollar index, which measures the U.S. currency against six major peers, ticked down slightly to 99.6 after jumping 0.6% on Friday to its strongest level since August 17.
Even so, the index was still on track for a second consecutive monthly decline, as U.S. Treasury bond-buyback plans earlier in the month revived debasement trades.
Dollar demand on Monday was also supported by renewed tensions in the Gulf and higher oil prices. U.S. forces struck Iran’s Larak Island on Sunday, marking the first known American strikes on Iran since late July, while U.S. President Donald Trump said in a social media post that Iran’s energy hub of Kharg Island is being “blown to smithereens”.
YEN WEAKNESS, G20 MEETING IN FOCUS
Focus will turn to a U.S.-hosted meeting of G20 finance ministers and central bank governors on Monday and Tuesday. Markets will watch for signs of coordinated efforts to sever ties with Iran, as well as measures aimed at easing concerns over rising U.S. debt and bond yields.
A persistently weak yen is also in focus, with the dollar’s renewed strength adding to pressure on the Japanese currency after it surrendered much of the gains made following July’s intervention.
The yen found some footing and inched higher at 159.78 after sliding beyond 160 per dollar on Friday, a level widely viewed as increasing the risk of official intervention and putting the spotlight back on whether Tokyo and Washington may step in again to support the currency.
U.S. Treasury Secretary Scott Bessent said on Sunday that recent yen moves had been “pretty well contained” and that he expected Bank of Japan Governor Kazuo Ueda to “do the right thing” on monetary policy.
“Historically, interventions have only held when fundamentals moved in the same direction,” said Carlos Casanova, UBP’s senior economist for Asia.
“The yen remains under pressure from a still-wide rate gap, negative real rates, and the Bank of Japan’s cautious pace.”
Elsewhere, China’s yuan firmed to 6.72 per dollar after data showed the country’s factory activity improved in August despite remaining in contraction.
The New Zealand dollar held flat near a three-month high at $0.5918 as traders braced for an interest rate hike at home this week. The Australian dollar edged up 0.1% to $0.7165.
(Reporting by Jiaxing Li in Hong Kong; Editing by Shri Navaratnam and Jamie Freed)
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