Dollar slides to two-month low ahead of Fed minutes

The U.S. dollar drifted near its lowest levels in two months on Wednesday as Treasury yields pulled back from recent highs and investors positioned ahead of the Federal Reserve's July meeting minutes, due later in the day.

The Dollar Index fell 0.21% to 99.43 in early trading, according to Reuters, with the euro rising to $1.1585 near a two-month high and sterling climbing 0.16% to $1.3554. The Japanese yen strengthened to 159.15 per dollar, pulling away from the closely watched 160 level. EUR/USD has been climbing toward the 1.1600 region, with the 200-day simple moving average at 1.1625 representing the next resistance level.reuters+1

Fading Rate Hike Expectations

The dollar's slide reflects a sharp repricing of Federal Reserve policy expectations. CME FedWatch data shows the implied probability of a September rate hike has dropped to roughly 35%, down from 47% a month earlier. The shift followed a string of soft U.S. economic data, including July retail sales declining 0.6% — the largest monthly drop in more than a year — unexpected job losses, and subdued inflation readings.eciks+1

"Long dollar positions are now being cut back in a thin summer market, as the fundamental justification for holding them fades," said Kit Juckes, chief FX strategist at Societe Generale Société Générale S.A., adding the dollar index could drift into a 95–100 range for the rest of the year.cnbc

Harvinder Kalirai, chief global fixed income and currency strategist at Alpine Macro, said in a client webcast that "the labour market and inflation surprise are rolling over and usually that coincides with a narrowing in the dollar's yield advantage, and that feeds through into a softer dollar".reuters

Bond Market and Geopolitical Crosscurrents

A selloff in U.S. Treasuries appeared to pause Wednesday, with the 10-year yield declining to 4.686% and the 30-year bond yield falling to 5.271% after hitting its highest level in nearly 20 years. MUFG's Derek Halpenny noted the rise in real long-term yields reflects "greater uncertainty over monetary policy fuelled by unclear communication from Chair Warsh" rather than inflation concerns.fxstreet+1

George Saravelos, global head of FX research at Deutsche Bank ↘ 1.24%, said uncertainty about the Fed's inflation reaction function poses another headwind for the greenback. "We have not boarded the dollar bullish train this year because global growth has been resilient, geopolitical developments pose continuous challenges to dollar dominance and the Fed has been ambivalent on its reaction function to inflation," he said.cnbc

Meanwhile, a stalemate in Middle East negotiations between the U.S. and Iran lifted oil prices to nearly three-week highs, keeping inflation risks alive but failing to provide the dollar its traditional safe-haven bid. The FOMC minutes, set for release at 2 p.m. ET Wednesday, may offer further clarity on internal debate within the central bank — three policymakers dissented in favor of an immediate hike at the July meeting.reuters+2