Dollar partially recovers from last week's losses

The dollar showed signs on Thursday of recovering from part of the losses it incurred last week, as investors awaited monetary policy directions from the Federal Reserve (the US central bank) during the Jackson Hole symposium, following recent data showing that inflationary pressures continued at a faster pace than economists had expected.

The dollar held firm near its highest level in eight days, as US inflation data and other economic indicators slightly bolstered expectations that the Federal Reserve would raise interest rates, ahead of the Jackson Hole symposium for central bank officials.

Data released in the previous session showed that inflation rose in July more than expected, reinforcing expectations that interest rates would remain at levels implying monetary tightening until the end of the year. Another report showed that the US economy grew by 1.5 percent in the second quarter.

The yen saw little change, trading at 159.35 yen per dollar, as traders awaited a speech by the deputy governor of the Bank of Japan. The dollar hovered near its highest levels in a week against three other currencies. The dollar index, which measures the performance of the US currency against a basket of six currencies, rose 0.3 percent since the start of the week to 99.158 points, after falling 0.8 percent last week.

Elias Haddad, Global Head of Market Strategy at Brown Brothers Harriman, said, “The dollar is receiving strong support from the continued outperformance of the US economy compared to other major economies,” expecting US interest rates to remain unchanged until the end of the year, contrary to market expectations.

Traders expect borrowing costs to remain unchanged in September, but they see a 70 percent probability of a rate hike of at least 25 basis points by December, amid the impact of Middle East tensions on oil prices. However, analysts noted that if the central bank does not raise interest rates this year, it could limit the dollar’s gains.

This development has brought to the forefront concerns about the erosion of the dollar’s purchasing power due to growing worries about debt and increased government intervention in markets, reflected in the rise of gold holdings by 25 percent since the beginning of the month to $78,853.88.

Attention now turns to the Jackson Hole symposium, as investors closely monitor statements by Federal Reserve Chair Jerome Powell for any signals regarding the latest moves by the Treasury Department and the path of monetary policy. Traders are also watching for signs of rate hikes in other jurisdictions.

Deputy Governor of the Bank of Japan Ryoichi Hemeno said that raising interest rates in a timely manner would help avoid a sharp rise in inflation, which could force the central bank to tighten monetary policy later, but he did not explicitly indicate an imminent rate hike.

Sho Suzuki, a market analyst at Matsui Securities, expressed concern about the prospects of rising prices, which likely led markets to conclude that his comments were not particularly dovish. However, the absence of a clear signal means there is a possibility that the yen could face renewed downward pressure.

The yen retreated from some of its gains since the US-Japanese intervention in currency markets last month, while the Canadian dollar stabilized at 1.3885 Canadian dollars per US dollar. US President Donald Trump said last Wednesday that “it’s time to teach Canada that it can’t do this anymore,” just days after the collapse of trade talks between the two countries.