Dollar Eases From One-Month High as Oil Prices Decline Ahead of Fed Decision

The U.S. Dollar Index fell 0.1% to 101.42 on Tuesday, easing from a one-month high as lower oil prices coincided with easing market concerns over inflation ahead of Wednesday's Federal Reserve policy decision.

Market developments

1. Oil prices declined for a second consecutive session after rising roughly 20% over the previous two weeks. Recent developments suggested some easing in Middle East tensions, although U.S. President Donald Trump said further military action could be considered if negotiations do not progress.
2. CME FedWatch data showed markets pricing a roughly 69% probability that the Federal Reserve would leave interest rates unchanged at 3.50%–3.75%, with about a 32% probability of a rate increase.
3. Goldman Sachs analysts described this week's policy decision as "unusually uncertain," noting that softer June inflation data had reduced the case for immediate tightening and that the Federal Reserve has historically avoided unexpected rate hikes.
4. Federal Reserve Chair Kevin Warsh has delivered relatively hawkish public comments since June and established several internal task forces reviewing communications and inflation frameworks. Compared with his predecessor, he has provided fewer forward policy signals.

Currency markets

1. EUR/USD rose 0.2% to 1.1388, with ECB policymaker Peter Kazimir reiterating that a September rate increase remains necessary.
2. GBP/USD edged higher to 1.3293 ahead of this week's Bank of England policy meeting.
3. USD/JPY traded near 163.81, with markets also monitoring this week's Bank of Japan meeting.

For Southeast Asian market participants

Market participants are expected to focus on the Federal Reserve's policy announcement and accompanying communication, particularly if policymakers' messaging differs from recent market expectations.

Sources: Reuters, CME Group, Goldman Sachs, Northwestern Mutual Wealth Management.