Dollar Wobbles as Rate Hike Bets Rise, Yen Gains Steam

The US dollar struggled to hold onto gains on Monday, even as traders increased their bets on a Federal Reserve interest rate hike this month. The greenback's weakness comes amid rising oil prices, which are fueling global inflationary pressures and prompting other major central banks to consider tightening their own policies.

Currency movements were largely subdued during early Asian trading, with US markets closed for a holiday. The dollar index slipped 0.07% to 99.09, remaining close to its recent low. The euro edged up to $1.1618, while sterling was little changed at $1.3519.

Market expectations for a September Fed hike now stand at roughly 57%, following a stronger-than-expected US jobs report on Friday. However, much of the outlook depends on upcoming US inflation data, which could either cement or cool those expectations. A hot reading would likely solidify a September move, while a cooler number could leave the dollar vulnerable to a dovish repricing.

Analysts note that even if the Fed does hike, the dollar's upside may be limited. Other major central banks, including the European Central Bank and the Bank of Japan, are also expected to tighten policy, reducing the policy divergence that has previously supported the dollar. The ECB is widely expected to raise rates to 2.75% this week, with markets pricing a 75% chance of another hike by December.

The Japanese yen extended its recent climb, rising over 0.2% to 155.88 per dollar. The currency has surged more than 2% last week, supported by expectations of a Bank of Japan rate hike at its September 18 meeting. Markets are pricing a 75% chance of a quarter-point increase, with a 60% probability of another move by year-end.

Strategists warn that persistent yen strength could signal a shift in global asset allocation, potentially threatening the performance of carry trades, which have been strong performers this year despite rising borrowing costs.

Elsewhere, the Australian dollar advanced 0.12% to $0.7208, while the New Zealand dollar was flat. Bitcoin remained steady above the $80,000 level, drawing support from investors diversifying away from the dollar.