Dollar Falls to Two-Month Low as Rate Hike Expectations Fade

The U.S. dollar fell to its lowest level in more than two months on Monday, August 17, as traders scaled back expectations for further Federal Reserve interest rate hikes following a series of softer economic data. The decline pushed the euro to a two-month high and provided some support for the Japanese yen, which had been under severe pressure.

The dollar index, which measures the greenback against a basket of major currencies, dropped to its weakest point since early June. The euro climbed to a two-month peak of around 1.1614. The yen strengthened modestly to approximately 159.15 per dollar, brushing aside data showing Japan's economy grew at a slower-than-expected pace in the April to June quarter.

The shift in market sentiment comes ahead of the Federal Reserve's annual symposium in Jackson Hole next week, where investors will seek clues on policymakers' interpretation of recent data. The repricing of rate expectations has been driven by last week's reports showing a surprise drop in U.S. retail sales and benign inflation, which have led markets to conclude the urgency for further tightening has diminished.

According to the CME FedWatch tool, traders now assign roughly a 30%...