The dollar held near a two-week high on Monday after Federal Reserve Chair Kevin Warsh struck a hawkish tone on inflation, and the move rippled through global bond markets. The yen weakened past ¥160 to the dollar, while German and Japanese government bond yields jumped to multi-year highs as traders raised their bets on rate hikes in the U.S., the euro zone and Japan.
Asian currencies traded mixed on Monday as the dollar held firm, and the yen came under renewed pressure after Warsh signaled the Fed still has more to do to tame inflation. The US Dollar Index stood around 99.6, little changed after rising 0.6% on Friday.
Warsh's hawkish tone lifts rate-hike bets
Warsh said the Fed would "have work to do" if policymakers failed to gain confidence that inflation was returning to its 2% target, according to Investing.com. The remarks pushed the market-implied probability of a September rate hike to around 57%. Separately, two-year Treasury yields climbed to a more than one-month high near 4.33%.
A separate Investing.com report put the odds of a 25-basis-point rate hike even higher, saying money markets lifted the probability to near 60%, up from roughly 35% earlier last week. The shift in U.S. rate expectations spilled into European debt markets, where Germany's two-year Schatz yield rose to 2.898%, its highest since July 2024. The 10-year Bund yield advanced to 3.2903%, its highest since 2011.
Yen slides past 160 as JGB yields hit decades-long highs
The yen briefly weakened past ¥160 a dollar, while yields on short-dated and 10-year Japanese government bonds rose to their highest levels in more than three decades. Two-year JGB yields rose to 1.72%, their highest since May 1995. 10-year JGB yields briefly touched 2.95%, the highest since 1996.
Traders now place the probability of the Bank of Japan raising interest rates next month at more than 90%, according to the Financial Times. The yen has lost more than half of the gains it made after Japan and the U.S. spent a record $96.5 billion defending the currency in July and August. U.S. Treasury Secretary Scott Bessent said he expected BOJ Governor Kazuo Ueda to do the right thing on policy and plans to meet him at the G20 gathering in North Carolina.
Oil surge and China data add to the mix
Higher oil prices are also supporting the dollar. Brent futures climbed about 2.7% to $90.51 a barrel after U.S. forces struck two Iranian launchers on Larak Island, with Iran retaliating against U.S. forces in Jordan. Meanwhile, the yuan showed little reaction to China's data, as the onshore USD/CNY pair fell 0.09% to 6.7200 even after the official manufacturing PMI rose to 49.8 from 49.2, still below the 50 mark that separates growth from contraction.
Traders are now watching Friday's U.S. nonfarm payrolls report, expected to show a rebound of 58,000 jobs after July's surprise decline, along with speeches from Fed Governors Michael Barr and Christopher Waller this week for further clarity on the Fed's path.
Sources: Investing.com, Investing.com Forex News, Financial Times
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