The dollar's rise is unstable, expectations for interest rate hikes by the European and Japanese central banks are warming up, and traders are waiting for the CPI data.

On Monday, despite rising expectations for a Federal Reserve interest rate hike, the U.S. dollar remained unstable due to escalating tensions in the Middle East exacerbating broader inflationary pressures, which could force global central banks to tighten monetary policy in unison. The changing sentiment towards the yen and concerns over the growing U.S. debt and policy uncertainty also weighed on the dollar. As the U.S. markets were closed on Monday for a holiday, the Asian forex market was relatively calm, with the dollar struggling to maintain the brief upward momentum brought by Friday's strong non-farm payroll report. As of the time of publication, the euro slightly rose to $1.1618, while the pound remained flat at $1.3519. The dollar fell 0.07% against a basket of currencies to 99.09, not far from its recent low of 98.558. Traders anticipate that the likelihood of the Fed raising rates in September following the release of non-farm payroll data is about 60%, which now largely depends on the inflation data coming out on Friday. If the CPI data is strong, a rate hike in September is almost a certainty, providing support for a stronger dollar. If the data is weak, it would bolster the case for keeping rates unchanged and make the dollar susceptible to a repricing of the Fed's dovish policy, said Elias Haddad, Head of Global Markets Strategy at BBH. Haddad stated, Even if a September rate hike from the Fed is a foregone conclusion, we still doubt that the dollar can reach new cyclical highs. The tightening policies of other major central banks limit the divergence in policies. The inflationary pressures stemming from persistently high oil prices are the main reasons the European Central Bank is almost certain to raise rates to 2.75% on Thursday. The futures market also indicates a 75% chance of another hike to 3.0% by December. Similarly, the market estimates a 75% chance of the Bank of Japan raising rates by 25 basis points at its meeting on September 18, with a 60% chance of another hike before December. On Monday, the yen rose more than 0.2% against the dollar to 155.88, following predictions from Prime Minister Fumio Kishida's economic advisor that the Bank of Japan will raise rates this month, sustaining the yen's upward trend. Last week, the yen appreciated over 2% due to various factors, including profit-taking from arbitrage trades and expectations of capital inflow. Eric Robertsen, Global Head of Research and Chief Strategist at Standard Chartered, noted that despite soaring global borrowing costs, arbitrage trading has been one of the strongest areas of macroeconomic performance this year. However, he mentioned that the yens recent strength could pose a threat to the excess returns of arbitrage trades. If the yen continues to strengthen, it may indicate that the rise in yen and dollar interest rates is starting to trigger changes in asset allocation, he said. In other currencies, the Australian dollar rose 0.12% to $0.7208, while the New Zealand dollar remained flat at $0.5880. Bitcoin stabilized above $80,000, latest at $80,145.95, having gained support recently as investors diversified funds from the dollar into other assets.