U.S. dollar shaky despite ramp-up in rate hike bets

A shift in sentiment towards the yen and worries about ever-growing U.S. debt and policy uncertainties also weighed on the dollar

The U.S. dollar was on shaky ground on ​Monday, despite a ramp-up in rate hike bets as Middle East tensions raised the prospect of broader inflationary pressures ‌that could force the central bank to tighten policy in tandem.

A shift in sentiment towards the yen and worries about ever-growing U.S. debt and policy uncertainties also weighed on the dollar.

Moves in currencies were largely subdued in early Asia trade with U.S. markets closed for a holiday, ​though the dollar struggled to sustain a brief lift it received from Friday’s blowout U.S. jobs report.

The euro was ​up marginally at $1.1618, while sterling was little changed at $1.3519. Against a range of currencies, the dollar dropped 0.07% to 99.09, not far from its recent low of 98.558.

Traders moved to price in a nearly 57% chance ​the U.S. central bank will hike rates this month in the wake of the nonfarm payrolls release, with much now depending on ​Friday’s inflation data.

A hot CPI print would all but seal a September hike and underpin a firmer U.S. dollar. A cooler reading would strengthen the case for a hold and leave the U.S. dollar vulnerable to a dovish Fed repricing, said Elias Haddad, global head of markets strategy ​at BBH.

Even if a September Fed hike becomes a done deal, we doubt the U.S. dollar will make new cyclical ​highs. Tightening by other major central banks limits policy divergence, Haddad said.

The inflationary impulse from still-higher oil prices is a major reason the European Central Bank ‌is ⁠seen certain to lift rates to 2.75% on Thursday. Futures also imply a 75% chance of another hike to 3.0% by December.

Likewise, markets are pricing a 75% chance the Bank of Japan (BOJ) will raise rates a quarter point at its meeting on September 18, with a 60% probability of another move by December.