U.S. Dollar Hits Two-Month Low as Fed Pause Bets Increase

The U.S. dollar dropped to a more than two-month low on Monday before paring some losses, as traders increasingly priced in the likelihood that the Federal Reserve will pause its monetary tightening campaign. A recent string of softer U.S. economic data has dampened expectations for further interest rate hikes, weighing on the greenback.

Shifting Fed Outlook Pressures Dollar

The U.S. Dollar Index (DXY), which measures the currency against a basket of six major peers, touched a low of 99.29 during the session, a level not seen since June 2. The decline follows reports showing a cooling in both consumer (CPI) and producer (PPI) inflation for July, coupled with a weaker-than-expected jobs report and soft retail sales data.

These indicators suggest the Fed may have more flexibility to hold rates steady. According to the CME FedWatch Tool, the probability of the central bank maintaining its current interest rate at its September meeting is now approximately 63%, reflecting a significant shift in market sentiment.

Focus Turns to FOMC Minutes and Oil Prices

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Investors are now awaiting the release of the minutes from the Federal Open Market Committee's (FOMC) July meeting for further clues on the central bank's policy direction. Market participants will be closely scrutinizing the document for insight into the reasoning behind the three dissenting votes against the last rate decision and for any hawkish commentary regarding inflation persistence.

A rebound in oil prices provided some support for the dollar, helping it move off its session lows. With global benchmark Brent crude futures trading above $90 per barrel, the rise stoked some inflation concerns while also boosting safe-haven demand for the U.S. currency.

Moves in Other Major Currencies

• Japanese Yen (JPY): The yen weakened against the dollar after Japan reported disappointing economic growth. Official data showed the country's GDP grew at an annualized rate of 1.1% in the second quarter, falling short of the 2.0% market forecast and slowing from the previous quarter.
• Indian Rupee (INR): The rupee lost ground as heightened energy risks in the Middle East prompted local importers to purchase U.S. dollars. The Reserve Bank of India (RBI) has been actively defending the currency through market interventions, including selling dollars and utilizing foreign exchange swaps to manage liquidity.