Dollar Slides as Fed Rate-Hike Bets Fade Amid Middle East Tensions

The US dollar stabilized near its lowest levels in several months against most major currencies on Tuesday, as market expectations for near-term monetary policy tightening receded. Yet investor sentiment remained fragile, under pressure from growing concerns over potential escalation of the war in the Middle East.

Euro and Sterling Near Recent Highs

The euro traded at $1.1581 during early Asian session hours and held close to its two-month high of $1.1614, reached on Monday. The British pound stood at $1.3548, remaining near its three-month peak recorded in the previous session.

Weak Data Undermines Rate-Hike Outlook

US retail sales declined in July—the first drop in nine months—following unexpected job losses in the prior month. This sequence of softer-than-expected economic data prompted investors to scale back expectations for a Federal Reserve interest rate increase.

September Hike Probability Falls Sharply

CME Group’s FedWatch tool shows traders now assign a 35% probability to a Fed rate hike in September, down from 52.2% one week earlier.

Analyst Caution on Inflation Path

Noushad Shah, Head of Fixed Income Sales for Europe, Middle East and Africa at Citadel Securities, stated: “Inflation has remained above target for most of the past five years. While the Federal Reserve may tolerate an annual pace of 2%, that leaves little room for maneuvering in a world facing persistent supply-side shocks.”

Yen Holds Below 160 Ahead of BOJ Meeting

The Japanese yen remained just below the 160-per-dollar level, drawing market focus toward the Bank of Japan’s upcoming meeting scheduled for next month. In the latest trading, the yen stood at 159.46 per US dollar.

Aussie and Kiwi Dollars Edge Higher

The Australian dollar rose 0.11% to $0.71119, staying near its highest level since early June. The New Zealand dollar traded at $0.5902 against the US dollar.