Key Highlights

  • The dollar fell to its lowest level in more than two months, with the euro touching a two-month high around $1.1614 and the yen strengthening 0.2% to around 159.04 per dollar
  • Traders now price just a 30.8% chance of a Fed rate increase at the September meeting, down from 52.2% a week earlier, according to the CME FedWatch tool
  • Japan's economy grew more slowly than expected in the second quarter due to weak household spending and Business investment, though analysts said the details largely reflected one-off factors
  • The offshore yuan traded at its weakest since 2023, with the dollar down 0.11% at 6.7372, after China reported slower industrial output growth and weaker-than-expected retail sales for July

Dollar Slides to Two-Month Low as Rate Hike Bets Unwind

The dollar fell to its lowest level in more than two months Monday as traders trimmed bets on a Federal Reserve Interest Rate hike following a run of softer US economic data. The euro touched a two-month high around $1.1614, last up 0.3% on the day, while the dollar index, which measures the currency against a basket of major peers, fell to its lowest level since early June.

The yen strengthened 0.2% to around 159.04 per dollar, brushing aside weaker-than-expected Japanese economic growth data. The currency held below the four-decade lows it touched in late July, just before Japanese and US authorities intervened in currency markets to stem its slide. Japan's economy grew at a slower-than-expected pace in the second quarter, weighed down by lackluster household spending and business Investment that analysts said mainly reflected one-off factors rather than a deeper economic slowdown.

Fed Rate Puzzle Keeps Markets on Edge

The repricing comes as markets prepare for the Federal Reserve's Jackson Hole symposium next week, where investors will look for clues on how policymakers are interpreting recent economic data. Traders now price just a 30.8% chance of a rate increase at the Fed's September meeting, down sharply from 52.2% a week earlier, according to the CME FedWatch tool, after last week's data showed a surprise drop in retail sales alongside benign Inflation readings.

Still, not all analysts are convinced the path is fully settled. Some economists say there are enough quirks in the recent data to keep markets on guard for a potential rate hike before year-end, noting that a wide range of views persists among forecasters on where Fed policy goes from here. The lack of fresh guidance from the Fed has left investors navigating an increasingly murky rate environment, with markets likely to remain sensitive to incoming data, commentary at Jackson Hole, and developments in the Middle East.

Yen's Path Remains Tied to Carry Trade Dynamics

Joint efforts by the US and Japan to stem the yen's slide have created a delicate backdrop for currency markets, with attention now shifting to whether the Bank of Japan will raise rates soon. One asset manager said intervention changed the currency's path but did not eliminate the interest-rate incentive supporting the carry trade, in which investors borrow cheaply in low-yielding currencies like the yen to chase higher returns elsewhere.

Yuan Weakens as China Data Disappoints

Against the Chinese yuan, the dollar was 0.11% lower at 6.7372 in offshore trading, hovering near its weakest level since 2023. China's industrial output growth slowed in July while retail sales grew less than expected, according to data released Monday, adding to signs of moderating momentum in the world's second-largest economy even as global markets focused primarily on the shifting US rate outlook.