NEW YORK – The US dollar held near multi-month lows against most major currencies on Tuesday (18/8), after traders scaled back expectations of near-term monetary tightening.
However, the threat of an escalation in the Middle East kept market sentiment fragile, according to Reuters.
The euro traded at USD 1.1581 in early Asian trading, not far from a two-month high of USD 1.1614 reached on Monday (17/8).
Sterling stood at USD 1.3548, slightly below the three-month high reached in the previous session.
The latest US economic data has strengthened expectations that the Federal Reserve has less reason to raise interest rates.
US retail sales fell in July for the first time in nine months, following data showing an unexpected loss of jobs in the previous month and relatively moderate inflation.
According to the CME FedWatch Tool, markets are now pricing in a 35% chance of a Fed rate hike at the September meeting, down from 52.2% a week earlier.
However, analysts remain cautious about the inflation outlook. Ongoing disruptions around the Strait of Hormuz and the deadlock in negotiations to end the US-Iran conflict could keep energy prices elevated and add to global inflationary pressures.
“Inflation has been above target for most of the past five years,” said Nohshad Shah, head of EMEA fixed income sales at Citadel Securities.
He said annual inflation of around 2% might still be acceptable to the Fed, but persistent supply shocks were leaving increasingly little room for additional pressure.
Iran has threatened to adopt a fully offensive military posture after negotiations to permanently end the conflict with the US reached an impasse.
Washington has also reiterated that it will not extend the ceasefire agreement reached in June, adding to uncertainty in financial markets.
Global bond yields rose again as investors remained concerned about the impact of high oil prices and a prolonged closure of the Strait of Hormuz. Brent crude futures rose 0.3% to USD 91.14 a barrel after reaching their highest level since 30 July on Monday.
The yield on 30-year US Treasury bonds remained near its highest level in almost 20 years.
Meanwhile, the yield on 10-year Japanese government bonds reached its highest level since September 1996.
Investors also continued to monitor US Treasury auctions over the past week, particularly as the US government needs to offer higher yields to attract investor demand and meet growing financing needs.
Anthony Saglimbene, chief market strategist at Ameriprise Financial, said investors were increasingly focused on rising US debt and concerns over the government’s fiscal discipline.
He said large-scale Treasury auctions could provide an opportunity for bond investors to demand higher yields amid growing concerns over the government’s fiscal position.
Meanwhile, the yen remained below 160 to the US dollar, shifting market attention to the Bank of Japan’s meeting next month.
Sources told Reuters that the Japanese central bank was expected to raise interest rates in September and could consider more aggressive tightening thereafter.
The yen was last at 159.46 to the US dollar, after giving up nearly half of its gains following a joint US-Japan intervention in late July.
The intervention was carried out to move the yen away from its weakest level in four decades.
The Australian dollar rose 0.11% to USD 0.71119 and remained near its strongest level since early June. Meanwhile, the New Zealand dollar stood at USD 0.5902. (DK/ZH)
