U.S. Dollar Holds Near Two-Month High as Fed Rate Hike Expectations Strengthen

The U.S. dollar remained close to a two-month high on Monday after stronger-than-expected employment data reinforced expectations that the Federal Reserve could raise interest rates later this year.

Currency markets were relatively stable compared to broader financial markets, where a sharp selloff in technology stocks weighed on investor sentiment across Asia.

Strong U.S. Jobs Data Boosts Dollar

The latest support for the dollar came from Friday’s robust U.S. labor market report.

Data showed that nonfarm payrolls increased by 172,000 jobs in May, comfortably beating market expectations and signaling continued resilience in the U.S. economy.

The stronger employment figures prompted traders to increase their expectations for tighter monetary policy, helping the dollar maintain its recent gains.

According to Jonas Goltermann, Chief Markets Economist at Capital Economics, the report suggests the U.S. labor market remains strong despite ongoing pressures from rising energy prices.

The firm now expects the Federal Open Market Committee (FOMC) to deliver two additional 25-basis-point interest rate hikes later this year as inflation risks persist.

Major Currencies Retreat Against the Dollar

The dollar’s strength pushed several major currencies lower.

The euro fell to a two-month low of $1.1507 against the U.S. dollar, while the British pound traded near a three-week low at $1.33165.

Commodity-linked currencies also weakened. The Australian dollar slipped to a two-month low of $0.7016, while the New Zealand dollar declined to $0.5779, also marking its lowest level in two months.

The broad-based weakness reflected growing confidence that U.S. interest rates may remain higher for longer.

Markets Increase Fed Rate Hike Bets

Even before the release of the jobs report, investors had been gradually increasing expectations for additional Federal Reserve tightening.

The global energy crisis linked to the ongoing conflict involving Iran has heightened concerns that inflationary pressures could remain elevated.

Market pricing now reflects more than a 70% probability of a Federal Reserve rate hike in December, according to CME FedWatch data. Just one week ago, the probability stood at approximately 45%.

Geopolitical Tensions Support Inflation Concerns

Geopolitical developments remain a major focus for investors.

Israel announced new military strikes targeting locations in western and central Iran on Monday, despite reports that U.S. President Donald Trump had urged Israeli Prime Minister Benjamin Netanyahu to avoid further escalation.

The conflict has increased concerns about global energy supplies and inflation, further strengthening expectations that central banks may need to maintain restrictive monetary policies.

Japanese Yen Near Intervention Territory

The Japanese yen continued to weaken against the dollar, trading around 160.33 per dollar.

The currency has now erased nearly all of the gains generated by Japan’s recent foreign exchange intervention, which involved approximately 11.7 trillion yen and was designed to stabilize the market.

Investors are also closely watching the Bank of Japan. According to reports, policymakers are expected to raise interest rates this month unless a major escalation in Middle East tensions significantly disrupts financial markets.

Analysts believe that any further appreciation in the yen will likely depend on whether the Bank of Japan signals a faster pace of future interest rate increases.

Bitcoin and Ether Recover From Recent Lows

Cryptocurrency markets posted modest gains after recent weakness.

Bitcoin rose more than 1% to approximately $62,615, rebounding after falling to its lowest level since October 2024 last week.

Ethereum also gained more than 1%, climbing to around $1,652 after recently hitting a 14-month low.

Despite the rebound, cryptocurrencies continue to face competition from other investment opportunities. The strong performance of artificial intelligence-related stocks and highly anticipated public listings such as SpaceX have attracted investor capital, limiting momentum in digital assets throughout much of the year.

Outlook Remains Focused on Central Banks

With U.S. economic data remaining resilient and geopolitical tensions keeping inflation concerns elevated, investors are increasingly focused on the path of interest rates.

The dollar’s recent strength reflects growing expectations that the Federal Reserve could maintain a hawkish stance, while developments in Japan, the Middle East and cryptocurrency markets continue to add volatility across global financial markets.