TLDR
- Fed Chair Kevin Warsh signaled more rate hikes may be needed if inflation does not fall to 2%
- Markets now price in a 58% chance of a September Fed rate hike, up from 40% a week ago
- The dollar index dipped slightly to 99.53 but remains near its strongest level since August 17
- The Japanese yen weakened past 160 per dollar before recovering slightly to 159.57
- US military strikes on Iran’s Larak Island pushed oil prices up 2.5% to $90.21 a barrel
The dollar eased slightly on Monday but stayed close to a two-week high after Federal Reserve Chair Kevin Warsh made hawkish comments at Jackson Hole on Friday.
Warsh said the Fed will “have work to do” if policymakers do not gain confidence that inflation is moving back toward 2%. This was his clearest signal yet that further rate hikes could be on the table.
Markets responded quickly. The probability of a September rate hike jumped to 58%, up from around 40% just a week ago. Yields on 2-year US Treasury notes held near a one-month high.
The dollar index fell 0.11% to 99.53 on Monday. It had hit 99.73 on Friday, its highest point since August 17.
Despite Monday’s dip, the index is still on track for a second straight monthly decline. Earlier in August, US Treasury bond-buyback plans revived trades that bet against the dollar.
Yen Hovers Near Key 160 Level
The Japanese yen was in focus after briefly sliding past 160 per dollar on Friday. That level is watched closely as a possible trigger for government intervention.
By Monday, the yen had recovered slightly to 159.57 per dollar. US Treasury Secretary Scott Bessent said yen moves had been “pretty well contained” and that he expected the Bank of Japan to act appropriately.
Analysts say any intervention may not hold for long. The yen is under pressure from wide rate differences between the US and Japan, negative real rates in Japan, and the Bank of Japan’s slow pace of policy change.
The euro gained 0.11% to $1.1597 and sterling edged up to $1.3543. Both currencies were on track for a second straight monthly gain against the dollar.
Oil Prices Jump on Gulf Tensions
Oil prices rose sharply on Monday after US military forces struck Iran’s Larak Island on Sunday. It was the first known American strike on Iran since late July.
Brent crude futures climbed 2.5% to $90.21 a barrel. President Trump posted on social media that Iran’s Kharg Island was being “blown to smithereens,” though there was no evidence of an attack on that location.
G20 Meeting and Jobs Report in Focus
Investors are now watching a G20 finance ministers meeting in Washington on Monday and Tuesday. Markets will look for signs of coordinated action on Iran and any steps to ease concern over rising US debt levels.
Friday’s August nonfarm payrolls report is the next major data point. That report, along with next week’s consumer inflation figures, could shape expectations ahead of the September Fed meeting.
China’s yuan firmed to 6.72 per dollar after data showed factory activity improved in August, though it remained in contraction territory.
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