Dollar Falls Again; US CPI Next Key Factor!

Dollar Falls Again; US CPI Next Key Factor!

The dollar index weakened to around 98.8 during Tuesday's trading (Sept 8), extending its decline for a second consecutive session. Pressure on the greenback stemmed primarily from the strengthening Japanese yen, as markets increasingly anticipate more aggressive monetary policy tightening by the Bank of Japan (BOJ) and a continued unwinding of carry trade strategies.

The yen regained support as investors raised expectations that the BOJ would hike interest rates this month. The prospect of higher Japanese rates has made the strategy of borrowing low-cost yen to purchase high-yield assets less attractive, prompting the closure of carry trade positions and strengthening the Japanese currency.

In the United States, investor attention has shifted to inflation data due for release this week. Markets are keen to see if price pressures remain strong enough to support a Federal Reserve rate hike at next week's meeting. Following last Friday's stronger-than-expected labor market data, the probability of a 25-basis-point rate hike is currently estimated at around 60%.

The dollar is also facing pressure from expectations of policy tightening by other central banks. The European Central Bank (ECB) is expected to raise interest rates this week, thereby narrowing the dollar's relative advantage against major currencies. The combination of more hawkish policies from both the BOJ and the ECB limits the scope for the greenback to strengthen.

Meanwhile, developments regarding the US-Iran conflict remain a focal point. Recent hostilities have pushed oil prices higher and kept inflation risks elevated. While this situation could reinforce expectations for tight monetary policy in the US, it simultaneously increases volatility and demand for safe-haven currencies.

The short-term bias for the dollar remains bearish as long as the index stays below the 99 level and the yen continues to strengthen. US inflation data will serve as the next major catalyst. A hotter-than-expected CPI could trigger a dollar rebound by increasing the likelihood of a Fed rate hike, whereas softer inflation figures could prolong the greenback's weakness.