Dollar Stays Near 99 Despite Rising Fed Hike Bets

The dollar index held near 99 on Monday even as markets priced a 60 percent chance the Federal Reserve raises rates next week, with ECB and Bank of Japan tightening narrowing the yield gap that usually lifts the greenback.

"A high consumer price index reading would effectively lock in a September rate hike and support a stronger dollar," Elias Haddad, a currency strategist, said. "A lower reading would leave the dollar vulnerable to a reassessment of expectations for a more accommodative Fed."

The Bloomberg Dollar Spot Index slipped 0.2 percent Monday, leaving the gauge near 99.09 and close to its recent low of 98.558. The euro rose about 0.1 percent to $1.1618, while sterling was little changed at $1.3519. The yen climbed more than 0.2 percent to 155.88 per dollar, its strongest since February, after Japan's prime minister signaled support for a Bank of Japan hike.

The dollar's failure to rally on hawkish Fed repricing marks a break from the pattern that dominated much of the past year, when widening rate differentials pushed the greenback to cyclical highs. US employers added 162,000 jobs in August, above forecasts, yet the currency slipped because traders see the ECB, BoJ and other major central banks tightening in lockstep. Policy divergence, the dollar's traditional tailwind, has narrowed to its thinnest in months, and the greenback now sits near the bottom of its recent range even as the odds of a Fed move climb.

Rate differentials compress as ECB, BoJ converge

Markets have almost fully priced an ECB hike to 2.75 percent on Thursday, with futures implying a 75 percent probability of another move to 3 percent by December. The Bank of Japan carries a 75 percent chance of a quarter-point hike at its Sept. 18 meeting, according to futures, and a 60 percent probability of a further move by year-end. The synchronized tightening, driven partly by oil near $97 a barrel after US-Iran clashes in the Strait of Hormuz, is compressing the yield advantage that has historically supported the dollar.

The last time the Fed and ECB tightened within weeks of each other was in 2022, when the dollar still rallied because the Fed moved faster and further. This cycle differs: the Fed is hiking from a higher base while its peers play catch-up, so the rate gap is closing from the top rather than widening. That dynamic leaves EUR/USD approaching a breakout zone, with strategists watching whether a cool US inflation print on Friday pushes the pair through resistance toward $1.17. The yen's recent surge has also begun to threaten carry trades, one of the year's most profitable macro strategies, as rising rates in Japan and the United States start to reshape global asset allocation.

CPI data is the swing factor

Friday's consumer price report is the decisive input before the Fed's Sept. 14-15 decision. A hot reading would all but confirm a hike and could lift the dollar, while a soft print would strengthen the case for holding rates and leave the greenback exposed to a dovish repricing. For EUR/USD, the outcome determines whether the pair breaks higher on ECB tightening or retreats as the Fed reasserts its hawkish lead. Either way, the coming week will test whether the dollar's weakness is a pause or the start of a broader trend as global central banks converge on tighter policy.

This article is for informational purposes only and does not constitute investment advice.