By Sophie Kiderlin
LONDON, Aug 31 (Reuters) – The dollar inched lower on Monday, but remained near a roughly two-week high, as markets ramped up bets on a rate hike after hawkish remarks from Federal Reserve Chair Kevin Warsh and renewed Gulf tensions, while the yen traded near the closely watched 160-per-dollar level.
The U.S. central bank will “have work to do” if policymakers do not get the confidence they need that inflation is heading down to 2%, Warsh said on Friday, in his clearest indication yet that further tightening may be needed to curb price pressure.
The comments fuelled bets on a September rate hike. Markets raised the implied probability of a move next month to 58%, while yields on interest-rate-sensitive 2-year U.S. Treasury notes held just below a more than one-month high.
“Warsh’s prepared remarks seemed designed to lift rate-hike expectations, rebalance the September debate towards the hawks and rebuild his inflation-fighting credibility,” Elwin de Groot, head of macro strategy at Rabobank, said.
“Warsh delivered an important signal: the Fed is not relying on tighter financial conditions alone and remains willing to tighten further if underlying inflation stalls,” he added.
Investors are now turning their focus to upcoming U.S. data, particularly Friday’s nonfarm payrolls report and next week’s consumer inflation figures, both of which could shape expectations ahead of the September Fed meeting.
The euro edged up roughly 0.11% to $1.1597, while sterling inched higher to $1.3543. Both currencies remained on track for their second consecutive monthly gains.
The dollar index, which measures the U.S. currency against six major peers, was down 0.11% to 99.53 after hitting 99.73 on Friday, its strongest since August 17.
Even so, the index was still on track for a second consecutive monthly decline, as U.S. Treasury bond-buyback plans earlier in the month revived debasement trades.
Elsewhere, renewed tensions in the Gulf drove oil prices higher, with Brent crude futures last up 2.5% on the day to $90.21 a barrel. U.S. forces struck Iran’s Larak Island on Sunday, marking the first known American strikes on Iran since late July.
U.S. President Donald Trump said in a social media post that Iran’s energy hub of Kharg Island is being “blown to smithereens” although there was no evidence that the island was under attack.
YEN WEAKNESS, G20 MEETING IN FOCUS
Focus will turn to a U.S.-hosted meeting of G20 finance ministers and central bank governors on Monday and Tuesday. Markets will watch for signs of coordinated efforts to sever ties with Iran, as well as measures aimed at easing concerns over rising U.S. debt and bond yields.
A persistently weak yen is also in focus, with the dollar’s renewed strength adding to pressure on the Japanese currency after it surrendered much of the gains made following July’s intervention.
The yen strengthened around 0.3% to 159.57 per dollar, after sliding beyond 160 per dollar on Friday, a level widely viewed as increasing the risk of official intervention and putting the spotlight back on whether Tokyo and Washington may step in again to support the currency.
U.S. Treasury Secretary Scott Bessent said on Sunday that recent yen moves had been “pretty well contained” and that he expected Bank of Japan Governor Kazuo Ueda to “do the right thing” on monetary policy.
“Historically, interventions have only held when fundamentals moved in the same direction,” said Carlos Casanova, UBP’s senior economist for Asia.
“The yen remains under pressure from a still-wide rate gap, negative real rates, and the Bank of Japan’s cautious pace.”
Elsewhere, China’s yuan firmed to 6.72 per dollar after data showed the country’s factory activity improved in August despite remaining in contraction.
(Reporting by Sophie Kiderlin in London and Jiaxing Li in Hong Kong; Editing by Jamie Freed and Jacqueline Wong)
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