United States Dollar Index trades under pressure as Yen buying accelerates

The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, extends its decline on Monday as a sharp rally in the Japanese Yen (JPY) outweighs support from elevated geopolitical tensions and Federal Reserve (Fed) interest rate hike expectations.

At the time of writing, DXY trades around 98.90, down 0.26% on the day, hovering near two-week lows. Trading conditions are expected to stay subdued as US stock and bond markets remain closed for the Labor Day holiday.

USD/JPY falls to a six-and-a-half-month low near 154.40 as hawkish Bank of Japan (BoJ) expectations, capital repatriation and the unwinding of Yen-funded carry trades support the Japanese currency.

Beyond the immediate market moves, persistent inflation concerns, questions over policy credibility and political risks also weigh on the Greenback, keeping the US Dollar debasement conversation alive. Attention will also turn to the US Treasury’s planned buybacks of longer-dated government securities starting Wednesday, which could influence bond yields and broader sentiment toward the currency.

Analysts at HSBC note that Fed Chairman Warsh’s Jackson Hole speech “helped ease one key part of that story by restoring confidence in the Fed’s commitment to fight inflation.” In HSBC’s view, this has “helped reduce the risk that weak policy credibility would become a lasting drag on the dollar,” thereby “denting the debasement narrative, at least for now.”

Traders increased bets on a rate hike at the Fed’s September 15-16 meeting following Friday’s robust employment report. At the same time, elevated Oil prices amid concerns over Middle East supplies add to inflation risks and further reinforce expectations of tighter monetary policy.

Over the weekend, the US military said it struck three Iranian crude Oil tankers on Saturday in response to Iran firing ballistic missiles at two US Navy ships. The Financial Times also reported that Saudi Aramco’s Jazan refinery was hit by a fresh strike on Monday.

According to the CME FedWatch Tool, traders currently see around a 58% chance that the US central bank will raise borrowing costs next week. Ahead of the decision, inflation data will provide a major test for rate expectations, with the Producer Price Index (PP) due on Thursday and the Consumer Price Index (CPI) scheduled for Friday.