The U.S. dollar index slipped modestly on Monday after a sharp repricing of Federal Reserve policy expectations last week, but the move was widely viewed as consolidation rather than a reversal of the hawkish shift.
The dollar was trading around 99.5, modestly lower on the session, after implied probabilities of a September Federal Reserve rate hike surged from roughly 35% to 64% following remarks by Fed Chair Kevin Warsh on Friday. Warsh argued that the labor market remains consistent with full employment despite weak monthly payroll gains, citing minimal labor-force growth as a key factor. He also emphasized that inflation remains the Fed’s predominant concern, with 12-month inflation at 3.7% and six-month inflation at 4.1%, and stressed the need for clear progress toward the 2% target.
Treasury yields remained elevated on Monday, with the 10-year note touching approximately 4.76%, its highest level since January 2025, a dynamic that analysts said was difficult to reconcile with a dovish reassessment of the Fed outlook. The analysis suggested that Monday’s dollar weakness reflected consolidation after Friday’s repricing rather than a fundamental shift in the currency’s outlook.
Geopolitical developments added another layer to the dollar’s setup. U.S. forces conducted strikes on Iranian targets on Sunday, the first such action since late July, prompting retaliatory attacks by Iran and pushing Brent crude back above $90 per barrel. The renewed military escalation raised safe-haven demand for the dollar while also reigniting concerns about energy-driven inflation pressures. Fed Governor Michael Barr has previously warned that a prolonged Middle East conflict could lift longer-term inflation expectations and make inflation more persistent, particularly if higher oil prices feed into transportation and production costs.
Tuesday’s schedule includes speeches by Barr and Fed Governor Christopher Waller, followed by the release of July JOLTS data and August ISM manufacturing figures. The analysis noted that if job openings remain stable and manufacturing activity shows resilience, it would reinforce the case for maintaining or increasing policy restraint. A scenario in which September hike odds rise further above 60%, yields remain elevated, oil stays near current levels, and geopolitical risks persist would present a clear bullish-dollar setup.
The dollar’s next leg, according to the analysis, hinges on whether these forces can sustain momentum. Friday’s August payroll report, expected to show around 55,000 new jobs with unemployment steady at 4.1%, will be a critical test. While the headline figure may appear soft, the interpretation could shift depending on labor-force growth and other details, given Warsh’s emphasis on the labor market’s current state.
The analysis cautioned that a single soft session does not invalidate Friday’s repricing, but warned that a sustained divergence—where yields remain high, hike probabilities stay elevated, geopolitical risks build, and the dollar fails to respond—would become increasingly significant. Under such conditions, the divergence between rates pricing and currency performance would warrant closer attention.
