US dollar slides to two-month low as Fed hike bets fade

The US dollar slid to its lowest level in more than two months on Monday as a string of soft economic data led traders to sharply reduce bets on further Federal Reserve interest rate increases, boosting rival currencies from the Japanese yen to the Canadian dollar.

The US Dollar Index fell to around 99.45, touching 99.30 earlier in the session — its weakest since mid-June. Federal funds rate futures priced in a roughly 67% probability that the Fed will hold rates steady at its September 15-16 meeting, up from 47.6% a month ago, with less than one full hike now expected through December.mezha+1

Soft Data Shifts the Outlook

Recent US releases have painted a picture of cooling momentum. Weaker nonfarm payrolls, subdued consumer and producer inflation readings, and softer retail sales figures have collectively undercut the case for additional tightening. BNY analysts noted that "softer U.S. data in recent weeks have lowered expectations for rate hikes, with less than one full increase priced in for December," while adding that elevated long-end Treasury yields reflect lingering concerns over fiscal confidence.fxstreet+1

No major new signals from the Fed are expected before the release of July meeting minutes on Wednesday and the Jackson Hole symposium, scheduled for August 27-29.mezha

Yen and Loonie Firm Against the Greenback

The yen strengthened 0.2% to 159.055 per dollar, posting a second straight day of gains despite Japan's GDP growth coming in at an annualized 1.1% in the second quarter, below expectations. Analysts at Capital Economics said the economy was expanding at an "acceptable pace" and flagged rising government consumption as an early sign that Prime Minister Takaichi's expansionary fiscal stance is taking hold.mezha

The Canadian dollar also advanced after Statistics Canada reported July consumer prices rose 3.0% year-over-year, above the 2.9% forecast, with the Bank of Canada's core CPI measure climbing to 2.3%. The USD/CAD pair fell to its lowest since early June, though the Bank of Canada is still widely expected to keep rates unchanged at 2.25% when it meets on September 2.fxstreet

Middle East Tensions Add a Wild Card

Geopolitical risks continued to simmer. Shipping through the Strait of Hormuz remained heavily restricted, keeping oil prices elevated. Brent crude hovered near $88.50 a barrel. A senior Iranian official told Reuters Thomson Reuters Corporation ↘ 1.12% that Tehran could escalate tensions further if diplomacy fails, warning it had shifted to a "fully offensive" posture. The commodity-linked Canadian and Australian dollars drew some support from the energy backdrop, while the Indian rupee edged lower to 95.48 per dollar as the Reserve Bank of India's early closure of its FCNR(B) swap window surprised some market participants.tradingview+2