The US dollar edged lower on Thursday, weighed down by a stronger yen.
The Japanese currency reached a three-week high after a Bank of Japan board member argued that the central bank should be flexible and increase rates as necessary to counter mounting inflationary pressures.
Monetary policy expectations in the United States have also softened, exerting further downward pressure on the dollar and yields.
Markets now price in a 60% probability of an interest rate hike at the Federal Reserve’s September meeting, down from almost 70%. Meanwhile, the likelihood of tightening by December fell, following recent comments from Fed officials. A hike in September remains the base case, which could continue to underpin Treasury yields and limit the dollar’s downside.
Attention now turns to today’s initial jobless claims and ISM services index, which could introduce some volatility ahead of Friday’s non-farm payrolls report. Stronger figures could revive speculation about interest rate increases, which would lift yields and the dollar. Weaker figures, on the other hand, could cast further doubt on the September rate hike and weigh on both.
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