The US dollar remained close to multi-month highs on Monday as investors assessed developments in the US-Iran peace negotiations. Markets also continued to adopt a more hawkish outlook for Federal Reserve policy.
The dollar index traded around 100.9 after the Federal Reserve’s latest meeting prompted investors to reduce expectations for near-term interest rate cuts.
Higher US Treasury yields provided additional support. Traders increasingly expect borrowing costs to remain elevated for an extended period.
Federal Reserve Expectations Support the Dollar
OCBC analysts said market attention had shifted from falling oil prices to concerns about tighter Federal Reserve policy.
The dollar has benefited from a sharp change in interest rate expectations. Markets are now pricing in approximately 40 basis points of additional Federal Reserve tightening by the end of the year.
That compares with around 20 basis points one week earlier. The shift highlights growing confidence that policymakers will maintain restrictive conditions while inflation remains elevated.
US-Iran Talks Improve Market Sentiment
Risk sentiment improved slightly after Iranian officials reported progress in negotiations with the United States.
The talks took place in Switzerland over the weekend and included mediators from Qatar and Pakistan. The diplomatic progress helped ease concerns about another escalation in the Middle East.
However, uncertainty remains after US President Donald Trump threatened renewed military action against Iran.
The United States and Iran are expected to continue technical negotiations this week. The discussions will focus on a proposed 14-point memorandum of understanding, according to Pakistani and Qatari mediators.
Euro and British Pound Weaken
The dollar’s strength was visible against several major currencies.
The euro edged lower to $1.145 as traders evaluated the growing policy gap between the Federal Reserve and the European Central Bank.
Meanwhile, the British pound slipped to $1.319. Softer UK inflation figures and the Bank of England’s decision to leave interest rates unchanged strengthened expectations for a prolonged pause in monetary tightening.
Markets Await US PCE Inflation Data
Beyond geopolitical developments, investors are preparing for several important US economic reports this week.
The main focus will be the Personal Consumption Expenditures inflation index. The PCE report is the Federal Reserve’s preferred measure of inflation.
The data could provide further guidance on the direction of US interest rates. A stronger-than-expected reading may reinforce expectations that borrowing costs will remain high, while weaker inflation could revive speculation about future rate cuts.
Japanese Yen Falls Beyond 161
The Japanese yen remained under heavy pressure and traded close to multi-year lows.
The USD/JPY exchange rate climbed to around 161.7, despite the Bank of Japan raising its benchmark interest rate by 25 basis points during the previous week.
The yen’s weakness reflects the wide interest rate difference between Japan and the United States. Higher US yields continue to make dollar-denominated assets more attractive to investors.
OCBC analysts noted that the effect of Japan’s earlier currency intervention has now been fully reversed.
However, the risk of another intervention remains high, particularly if the yen continues to weaken rapidly.
USD/JPY holding above the 160 level has kept traders alert. Japanese authorities have previously intervened in the currency market around similar levels.
Australian Dollar Holds Near 70 Cents
The Australian dollar also moved lower. AUD/USD declined 0.1% to $0.7005, remaining slightly above the closely watched 70-cent level.
Investors are now awaiting Australian inflation and employment data due later this week.
ANZ expects underlying inflation to rise slightly in May. The bank also forecasts that Australia’s unemployment rate will decline to 4.4%.
Both reports could influence expectations for the Reserve Bank of Australia’s next policy decisions.
The Australian dollar also remains sensitive to economic developments in China, Australia’s largest trading partner. Investors continue to monitor the strength of China’s economic recovery and its potential impact on regional demand.
