The dollar index fell to 99.8 at the start of August, its lowest level in seven weeks, as renewed strength in the yen and a continued, albeit partial, rotation by foreign investors out of dollar positions weighed on the US currency. The yen extended its rally after the US Treasury increased its purchases of the Japanese currency using its substantial euro reserves, amplifying the initial rebound that followed Tokyo’s intervention in the foreign exchange market.
These moves added to the dollar’s downward pressure in the wake of the Federal Reserve’s most recent policy meeting. As widely anticipated, the Fed left interest rates unchanged. However, Fed Chair Warsh signaled a degree of hesitation about committing to rate hikes as the preferred response to higher inflation, prompting overseas investors to further reduce their exposure to dollar-denominated assets. Even so, interest rate futures suggest that slightly more than half of market participants still expect the Fed to raise rates in September.
