Dollar Holds Near Two-Week High as Fed Rate Hike Bets Rise

The U.S. dollar held close to a two-week high on Monday as investors increased bets on a Federal Reserve interest rate hike following hawkish comments from Chair Kevin Warsh, while renewed tensions in the Gulf boosted demand for the greenback.

Warsh said Friday that the Federal Reserve would “have work to do” if policymakers lacked confidence that inflation was returning toward the central bank’s 2% target. His remarks strengthened expectations that further monetary tightening could be necessary.

Markets now price in a 57% probability of a September Fed rate hike. The yield on the rate-sensitive two-year U.S. Treasury note remained near a more than one-month high of 4.33%.

Investors are turning their attention to Friday’s U.S. nonfarm payrolls report and next week’s consumer inflation data, which could play a major role in shaping expectations ahead of the September Fed meeting.

The U.S. Dollar Index slipped slightly to around 99.6 after gaining 0.6% on Friday and reaching its strongest level since August 17. Despite the recent rebound, the index remained on course for a second consecutive monthly decline.

The euro gained about 0.1% to $1.1590, while the British pound was broadly unchanged at $1.3545. Both currencies were headed toward their second straight monthly advances.

Geopolitical tensions also supported safe-haven dollar demand after U.S. forces struck Iran’s Larak Island on Sunday, the first known American strikes against Iran since late July. President Donald Trump also said Iran’s Kharg Island energy hub was being heavily attacked.

Meanwhile, the Japanese yen remained under pressure near the key 160-per-dollar threshold. It strengthened modestly to 159.78 after weakening beyond 160 on Friday, renewing speculation that Japanese authorities could intervene again to support the currency.

Markets are also watching a U.S.-hosted G20 finance ministers and central bank governors meeting on Monday and Tuesday for signals on Iran, U.S. debt and rising bond yields.

Elsewhere, China’s yuan strengthened to 6.72 per dollar after August factory data showed improvement despite continued contraction. The New Zealand dollar held near a three-month high at $0.5918, while the Australian dollar rose 0.1% to $0.7165.