Lingering worries about a big U.S. slowdown were blown away last Friday after July payrolls data smashed market expectations.
With employers adding 528,000 jobs and analysts pointing to the Fed's data-driven approach, markets are now pricing in a 70% chance of a 75 basis points hike in September, up from about 41% before the data.
This has brought markets full circle after equity bulls had boosted U.S. stocks to two-week highs, pushing them from 2020 lows, as growth worries trounced inflation risks.
Still, the blockbuster jobs data adds to the possibility of a central-bank-induced slowing next year as surging labor costs limit disinflation while flattening profit margins, JPMorgan's economists said.
And dollar sceptics have their own reasons.
Westpac economist Elliot Clarke believes the retreat of the DXY index from 2022 highs is only the beginning of its downtrend for the next 18 months.
He says that on a two-to-three year view, the U.S. is increasingly at risk of stagnation due to weak consumption and investment, while the euro zone is showing resilience.
U.S. CPI data out on Wednesday could be the clincher for the next big move as central banks wrestle with multi-decade high inflation.
Hopes of an agressive Fed strengthened the dollar further on Monday and Treasury yields also rose, but oil prices were stuck near multi-month lows, more influenced by a slow recovery in China's crude imports.
Equity markets fell and S&P 500 futures and Nasdaq futures also retreated.
And in news that could provide relief to European travellers, a board member of German airline Lufthansa said the worst flight chaos is over. read more
Also, in Hong Kong, which has suffered from one of the world's most stringent COVID-19 restrictions, authorities cut COVID quarantine to three days in hotel from seven for incoming travellers.
Key developments that could influence markets on Monday
Fed's Bowman: more 75 basis-point hikes should be on the table
Asia shares subdued, dollar encouraged by U.S. rate risk:
China's exports gain steam but outlook cloudy as global growth cools:
