Dollar Weakens on Diminished Rate Hike Bets, but Oil Rally Caps Losses

The U.S. dollar declined on Monday, briefly falling to its lowest level in over two months as markets reduced expectations of a near-term rate hike by the Federal Reserve (Fed). At the same time, oil prices extended last week's gains, keeping inflation concerns alive.

In New York trading, the dollar index (DXY), which tracks the greenback against six major currencies, fell 0.1% to 99.58. The index had earlier dipped to 99.29, its weakest since June 2.

Foreign exchange investors had just navigated a pivotal week. Economic data showed that year-over-year increases in both consumer and producer prices slowed in July, across both headline and core measures.

These figures, combined with the previously released unexpectedly weak July nonfarm payrolls report and Friday's disappointing retail sales data, collectively suggest the Fed has more breathing room to avoid immediate policy tightening.

Market expectations for interest rates have adjusted accordingly. According to CME's FedWatch tool, markets now assign about a 63% probability to the Fed holding rates steady in September, with a near 37% chance of a 25-basis-point hike.

Later this week, the Fed will release the minutes from its July Federal Open Market Committee (FOMC) meeting, potentially offering further clues into its policy thinking.

At the July FOMC meeting, three regional Fed bank presidents dissented against the decision to hold rates steady. Monetary policy observers will closely watch the minutes for any further hawkish commentary.

"The minutes could reveal the true concerns of the hawkish camp, particularly what factors prompted the three dissenting members to vote for an immediate 25-basis-point rate hike in July," said Thierry Wizman, Macquarie's global strategist for foreign exchange and interest rates.

"If one of those reasons is the need to re-establish the Fed's credibility after years of inflation running above target, that would be a hawkish signal, as it implies hawkish sentiment within the FOMC could persist."

"More importantly, the minutes might clarify what specific conditions or thresholds would compel a majority of policymakers to vote for monetary tightening, even if Kevin Warsh himself is reluctant to explicitly state the Fed's 'reaction function.'"

Brent Crude Surpasses $90

The dollar recovered from its intraday lows on Monday, partly due to rising oil prices boosting risk-off demand. Brent crude futures surpassed $90 per barrel.

Amid rising oil prices, the U.S. and Iran remain locked in a standoff over the Strait of Hormuz.

Both sides claim control over the strategic waterway, with Tehran demanding Washington meet certain conditions—such as halting hostilities across all fronts and unfreezing Iran's seized assets—before reopening the vital passage.

Meanwhile, Iran is working with Oman to develop a management framework for the Strait of Hormuz.

Fox News quoted President Trump on Monday, saying, "If Oman gets in the way, we'll blow them to hell."

Monday also marked the expiration date of the Memorandum of Understanding (MoU) signed by the U.S. and Iran in mid-June. The agreement had effectively collapsed in July after both sides launched attacks following incidents involving commercial vessels being targeted in the Strait of Hormuz. Trump told reporters he would not extend the deal.

Yen Weakens, Indian Rupee Under Pressure

The Japanese yen weakened slightly on Monday. The dollar-yen pair rose 0.1% to 159.49.

The yen has given back about half of its gains against the dollar since the historic joint intervention by the U.S. and Japan at the end of July.

Another factor behind the yen's weakness is weaker-than-expected domestic economic growth data.

Official figures showed Japan's economy grew at an annualized rate of 1.1% in the second quarter, below the market's forecast of 2% and revised 1.9% growth in the previous quarter.

On a quarterly basis, Japan's GDP grew 0.3%, below the expected 0.5%. Weak private consumption and shrinking capital expenditure dragged down overall economic performance.

Meanwhile, the dollar-rupee pair rose 0.4%, as Indian importers rushed to buy dollars amid ongoing Middle East energy risks.

Nonetheless, the Indian rupee remains under depreciation pressure. The Reserve Bank of India (RBI) has taken proactive and multi-pronged measures to support the rupee.

As of around 5:40 a.m. Taiwan time on Tuesday (18th), prices were:

Dollar index at 99.5811. +0.0009%

EUR/USD at 1.1576. -0.0529%

GBP/USD at 1.3540. -0.0148%

AUD/USD at 0.7103. -0.0141%

USD/CAD at 1.3872. -0.0144%

USD/JPY at 159.3600. -0.0627%