Dollar Stabilizes as Inflation Risks Return to Haunt Markets
The US dollar stabilized during Tuesday's trading (Aug 18) after facing pressure in previous sessions. The Dollar Index hovered around 99.65 after dipping to 99.33—its lowest level since early June. Demand for the greenback resurfaced as escalating Middle East tensions shifted market attention away from expectations of a more dovish Federal Reserve.
On the economic front, the dollar remains overshadowed by a series of weak US data points. July Nonfarm Payrolls contracted, producer price growth remained relatively flat, and retail sales fell by 0.6%. These conditions led the market to price in a roughly 65% probability that the Fed would hold interest rates steady in September.
However, a sharp rise in oil prices has reignited inflation concerns. Brent crude climbed above US$91 per barrel after a tentative US-Iran agreement ended without resolution, while tensions in the Strait of Hormuz intensified once more. Elevated energy risks have made market participants reluctant to push the dollar lower, as the Fed could still maintain a tight policy stance should inflation rebound.
The Japanese yen weakened again, with the USD/JPY pair approaching the psychological 160 level. This depreciation occurred despite the Bank of Japan keeping the door open for further rate hikes. The yield differential between the US and Japan, along with carry trade activity, remains a primary source of pressure on the yen, while also heightening vigilance regarding potential new intervention should USD/JPY decisively break through the 160 mark.
Other major currencies also lost some momentum. The euro retreated after hitting its highest level since mid-June, while the pound sterling dipped slightly from multi-month highs. Markets are now awaiting the minutes from the July FOMC meeting and the Jackson Hole symposium for clues as to whether the Fed is more concerned about economic weakness or the inflation risks posed by rising energy prices.
Newsmaker Analysis: The dollar is currently caught in a tug-of-war between weakening US economic data and a surge in oil prices that has revived inflation risks. If Middle East tensions continue to drive up energy prices, the dollar could find support from safe-haven demand and expectations of higher interest rates. Conversely, if oil prices ease and US data weakens again, pressure on the DXY could persist, creating room for the euro, the pound, and other major currencies to strengthen. (arl)
Source: Newsmaker.id
