US FX WRAP: Dollar weighed by lower yields and dovish Fed Williams

USD was weaker, weighed by lower US yields, with crude prices choppy, although diesel futures are back at YTD highs. The main update was via the NY Fed Chair Williams who sees one more rate hike as appropriate in 2026, as he previously said, and doesn't  see a need for a rate hike in 2027 at this time, citing an optimistic view on inflation returning to 2%, not seeing broad price pressure outside AI and energy. Near-term focus lies on the CPI report on Wednesday, Core M/M expected 0.2%, Core Y/Y 2.5%, and Headline M/M 0.6%.

Away from the Fed, newsflow was centered on geopolitics. The Saudi-Houthi conflict remains, as Houthis have reportedly struck near the ARAMCO HQ; meanwhile, Trump and Netanyahu reportedly spoke last week, discussing a potential joint operation that would hit Iranian military and nuclear targets.

JPY was modestly firmer, failing to match peers' gains against the USD on a Bloomberg report that sent mixed signals for the JPY. JPY initially weakened as sources said the BoJ is to lean against back-to-back hikes in October, before strengthening on the prospect that the BoJ could adjust the 2% inflation target language to "approx. 2% from "approaching 2". USD/JPY hit session lows of 157.83 before moving back towards ~158.33.

Scandis, NZD, and CAD outperformed in the G10 space. On EUR/GBP, ING cut its EUR/GBP forecast, forecasting EUR/GBP to trade in a 0.84-0.85 range for at least several more months, arguing that "Idiosyncratic risks surrounding the euro are unlikely to fade anytime soon, and the Bank of England has sent a clear enough signal that it is prepared to hike".