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The U.S. dollar weakened on Monday as softer economic indicators reduced expectations that the Federal Reserve will raise interest rates again in the near term, while the Japanese yen gained modestly despite disappointing economic growth figures.
The U.S. Dollar Index fell 0.2% to 99.47 in early trading after closing 0.3% lower on Friday. Recent U.S. economic data, including nonfarm payrolls and consumer and producer inflation figures, have encouraged investors to scale back expectations for additional Federal Reserve tightening this year.
Fed funds futures indicated roughly a 70% probability that policymakers will keep interest rates unchanged at the September meeting, according to CME Group’s FedWatch tool. Investors are now awaiting the Federal Reserve’s July meeting minutes on Wednesday, followed by the Jackson Hole symposium, for further signals on the direction of U.S. monetary policy.
The Japanese yen strengthened slightly, with USD/JPY declining 0.2% to around 159 yen. Japan’s economy expanded at an annualized rate of 1.1% during the second quarter, missing the 2.0% market forecast and slowing from a revised 1.9% expansion in the previous quarter. Quarterly GDP increased 0.3%, below expectations of 0.5%.
Weak consumer spending and lower capital investment weighed on Japanese growth, although exports remained resilient due to demand for hybrid vehicles and semiconductor equipment.
Elsewhere in currency markets, USD/CNY was broadly unchanged, while the Australian dollar gained 0.2% against the greenback. The Indian rupee weakened, with USD/INR rising 0.2%, after the Reserve Bank of India unexpectedly shortened the deadline for banks to access a discounted foreign-exchange swap facility for non-resident deposits.
Geopolitical uncertainty in the Middle East also remained in focus. Prospects for a U.S.-Iran agreement to reopen the Strait of Hormuz have weakened as tanker traffic through the crucial shipping route declines. Iranian Foreign Minister Abbas Araqchi said Tehran had yet to decide whether to resume negotiations with Washington, keeping energy prices and global currency markets sensitive to further developments.
