U.S. dollar recovers on rate hold, Middle East tensions

Geopolitical developments offset earlier weakness in the dollar, which had dropped to its lowest since July 20 after the U.S. central bank decision

The U.S. dollar found its ‌footing in Asian trading on Thursday after the central bank kept its policy interest rate on hold and Chair Kevin Warsh left markets guessing about how divisions on its rate-setting committee would resolve.

The dollar index nudged up 0.1% to 100.93.

Geopolitical developments offset earlier weakness in the dollar, which had dropped to its lowest since July 20 after the U.S. central bank decision.

Despite three committee dissents in favour of a July hike, Chair Warsh stopped short ​of flagging an imminent hike, echoing June’s tone, said IG market analyst Fabien Yip in Sydney. That is ​starting to unsettle investors: a Fed unwilling to commit to further tightening raises the question of whether it can keep ‌long-term ⁠inflation expectations anchored.

Treasury bonds reacted strongly to the central bank decision, with the 30-year yield jumping to its highest in around two decades.

Fed funds futures are pricing in a 34.9% probability that the central bank will hold its rate at its next two-day meeting ending September 16, compared with a 24% probability before ​the latest meeting, the CME ​Group’s FedWatch tool showed.

We ⁠continue to expect the Fed to remain on hold, but we have concerns that markets may react badly down the road to a perception that it ​is not moving when it should, said Steve Englander, global head of ​G10 FX research ⁠at Standard Chartered in New York. There was considerable commentary by market participants on the vagueness of his answers to questions that in the past would have been answered directly.

Others saw the dollar’s decline as temporary.

We look ⁠for ​the USD to bounce back from this retreat, aided by market ​expectations for future Fed tightening and U.S. economic resilience, HSBC analysts wrote in a research report.