Dollar at one-month high as ASEAN markets eye Fed’s next move

The U.S. dollar held at a one-month high on Tuesday, as markets in Singapore, Kuala Lumpur, and Jakarta weighed a lingering chance of a Federal Reserve rate hike this week. Even as falling oil prices eased some inflation concerns, the greenback remained supported by cautious Treasury market positioning.

The dollar index, which tracks the greenback against a basket of major currencies including the yen and euro, edged up 0.03 per cent to 101.55. The euro slipped 0.01 per cent to $1.1366, while the dollar gained 0.05 per cent against the Japanese yen to 163.82. Sterling eased 0.02 per cent to $1.3284.

Although a pause in U.S. attacks on Iran pushed oil prices lower and temporarily soothed inflation jitters, U.S. Treasury yields retreated only modestly compared with moves in other markets overnight. This divergence has kept the dollar well bid, particularly against lower-yielding currencies like the yen and Swiss franc.

“The lack of meaningful buying at the front end of the Treasury curve has helped keep the U.S. dollar well supported,” said Chris Weston, head of research at Pepperstone.

Fed rate hike odds climb ahead of July meeting

The Federal Reserve will hold a two-day policy meeting ending on Wednesday. A growing number of major brokerages now see a real risk of a rate hike this week, given the surge in oil prices during the month and the escalation in Middle East tensions.

Expectations for a hike of at least 25 basis points stand at 36.3 per cent, according to CME FedWatch, up sharply from 16 per cent a week ago. Markets are pricing in an 81 per cent chance for a hike at the central bank’s September meeting.

“If we do get a surprise hike, surely that’s going to lend support to the dollar, probably going to see new highs and probably sustain the level of strength on the dollar especially against the lower yielders, which are Japanese yen and Swiss franc,” said Mahjabeen Zaman, head of FX research at ANZ Bank.

What this means for ASEAN currencies and trade

A stronger dollar typically puts pressure on ASEAN currencies such as the Singapore dollar, ringgit, and baht, raising import costs and complicating central bank policy. For Singapore, a tightly managed exchange rate regime means the Monetary Authority of Singapore (MAS) may need to adjust its slope parameters if dollar strength persists.

Investors will also look to U.S. second-quarter GDP data and the Fed’s preferred inflation gauge, core PCE inflation, later this week for more clues on the health of the world’s biggest economy.

BOJ and BOE meetings: a packed central bank week

The Bank of Japan and Bank of England are widely expected to keep rates unchanged at their meetings on Thursday and Friday, respectively, while maintaining a cautious stance on inflation. With the yen pinned near 40-year lows against the dollar, the BOJ is expected to leave the door open to further hikes to stem the currency’s decline, though policymakers will likely stay ambiguous on timing.

“With no change in rates expected, we think that the BOJ will need to strike a fairly hawkish note in order to make clear to markets that it is credible in its attempts to both achieve its inflation mandate and support the yen,” said Matthew Ryan, head of market strategy at Ebury.

Other currency moves and crypto

The Australian dollar weakened 0.11 per cent to $0.6981, while the New Zealand dollar lost 0.12 per cent to $0.5766. In cryptocurrencies, bitcoin fell 1.88 per cent to $63,694.59, and ether declined 2.83 per cent to $1,890.30.

Frequently asked questions

Why is the U.S. dollar at a one-month high?

The dollar is supported by lingering expectations of a Fed rate hike this week, as well as cautious Treasury market positioning despite falling oil prices.

What is the chance of a Fed rate hike in July?

According to CME FedWatch, markets see a 36.3 per cent chance of a 25-basis-point hike at the July meeting, up from 16 per cent a week ago.

How could a stronger dollar affect ASEAN economies?

A stronger dollar pressures ASEAN currencies, raises import costs, and may force central banks like the MAS to adjust exchange rate policies to maintain stability.