The U.S. dollar declined on Monday as waning bets on further Federal Reserve interest rate hikes weighed on the currency, while rising geopolitical tensions in the Middle East supported traditional safe-haven assets such as gold and the Japanese yen.
The dollar index, which measures the greenback against a basket of six major peers, fell 0.2% to 104.10, extending losses from last week. Traders trimmed wagers on additional Fed tightening after data showed U.S. consumer inflation cooled more than expected in August, reinforcing expectations that the central bank may hold rates steady at its September policy meeting.
Fed funds futures implied a 41% probability of a 25-basis-point rate hike by December, down from 47% a week earlier, according to CME Group’s FedWatch tool. The shift in rate expectations reduced the dollar’s appeal, as higher U.S. yields have been a key driver of its strength in recent months.
Meanwhile, concerns over a potential escalation in the Israel-Hamas conflict and broader regional instability lifted demand for safe-haven assets. Spot gold rose 0.5% to $1,925 per ounce, while the yen gained 0.3% against the dollar, trading at 146.80. The Swiss franc, another traditional safe haven, also strengthened 0.2%.
Analysts noted that the dollar’s weakness could persist if geopolitical risks continue to dominate market sentiment, overshadowing domestic economic data. "The interplay between Fed policy and geopolitical risk is becoming more pronounced," said a strategist at a major European bank. "Until there’s clarity on either front, the dollar is likely to remain under pressure."
In currency markets, the euro rose 0.3% to $1.0780, while the British pound added 0.2% to $1.2650. The dollar’s losses were more pronounced against the yen, which benefited from both safe-haven flows and speculation that the Bank of Japan may signal further policy normalization at its upcoming meeting.
The decline in the dollar index follows a week of volatility driven by shifting expectations around global central bank policies and heightened geopolitical risks. Traders will closely monitor upcoming U.S. economic data, including retail sales and industrial production reports, for further clues on the Fed’s next move.
