The US dollar rally remains unstable as expectations for rate hikes by the European and Japanese central banks rise, with traders waiting for the CPI data.

According to Zhitong Finance APP, on Monday, despite an increase in expectations for a Federal Reserve rate hike, the US dollar remained unstable due to escalating tensions in the Middle East intensifying broader inflationary pressures, which may force global central banks to tighten monetary policy simultaneously. Shifting sentiment toward the yen and concerns over the mounting US debt and policy uncertainty also put pressure on the dollar.

As the US market was closed for a holiday on Monday, forex trading in early Asian hours was relatively calm, making it difficult for the dollar to maintain the brief momentum gained from last Friday’s strong US non-farm payroll report. At the time of writing, the euro was up slightly to $1.1618, the pound was basically flat at $1.3519. The US dollar index fell 0.07% to 99.09, not far from the recent low of 98.558.

Traders estimate the probability of a Fed rate hike in September after the non-farm payroll data at about 60%, but this largely depends on Friday’s inflation figures.

“If the CPI data is strong, a September rate hike is almost certain, which would support a stronger dollar. If the figures are weak, the case for holding rates steady will be reinforced, making the dollar vulnerable to renewed dovish repricing by the Federal Reserve,” said Elias Haddad, head of global markets strategy at BBH.

Haddad added, “Even if a September rate hike by the Fed is a done deal, we still doubt the dollar can set new cyclical highs. Tightening by other major central banks limits the scope for policy divergence.”

The inflationary pressures from persistently high oil prices are the main reason why the European Central Bank is almost certain to raise its rate to 2.75% on Thursday. Futures markets also suggest a 75% chance of another hike to 3.0% by December. Similarly, markets expect a 75% likelihood of a 25 basis point rate hike by the Bank of Japan at its September 18 meeting, and a 60% probability of another hike before December.

On Monday, the yen climbed more than 0.2% against the dollar to 155.88, after an economic adviser to Japanese Prime Minister Sanae Takaichi predicted the Bank of Japan would hike rates this month, continuing the yen’s rally. Last week, boosted by factors such as unwinding of carry trades and capital repatriation expectations, the yen rose more than 2%.

Eric Robertsen, global head of research and chief strategist at Standard Chartered Bank, said that despite a surge in global borrowing costs, carry trades have been one of the strongest-performing macro strategies so far this year, though the yen’s recent strength “may pose a threat to excess returns from carry trades.” “If the yen continues to strengthen, this could signal that rising yen and dollar interest rates are beginning to trigger shifts in asset allocation,” he said.

Among other currencies, the Australian dollar rose 0.12% to $0.7208, while the New Zealand dollar was flat at $0.5880.

Bitcoin hovered above $80,000, last at $80,145.95, recently supported as investors diversified funds from the US dollar to other assets.