The US dollar remained close to a one-year high on Tuesday as investors increased their expectations that the Federal Reserve could raise interest rates again.
Meanwhile, the Japanese yen traded near its weakest level in almost 40 years. The currency also approached levels that previously prompted Japan to spend billions of dollars on foreign exchange intervention.
US Dollar Nears One-Year High
The US Dollar Index traded near 101, remaining close to last week’s one-year peak of 101.13.
Higher US Treasury yields supported the currency after traders significantly revised their expectations for the Federal Reserve’s interest-rate policy.
According to CME FedWatch data, futures markets were pricing in an approximately 51% probability of a Federal Reserve rate increase by September.
Federal Reserve Signals Support the Dollar
Hawkish signals from the Federal Reserve provided the main source of support for the dollar.
The central bank’s latest policy meeting showed that most officials expected at least one additional interest-rate increase before the end of the year.
Persistent inflation remains a major concern for policymakers. Rising energy prices linked to the war in the Middle East could keep price pressures elevated over the coming months.
As a result, investors are considering whether the Federal Reserve may need to tighten monetary policy further.
Pound Falls Following UK Political Turmoil
The British pound declined by 0.1% during volatile trading after UK Prime Minister Keir Starmer resigned.
The announcement created fresh political uncertainty in Britain, placing additional pressure on the currency.
The GBP/USD exchange rate traded near $1.3245 during Tuesday’s session.
Euro Remains Near Three-Month Low
The euro held close to a three-month low at approximately $1.1423.
European Central Bank President Christine Lagarde recently played down concerns that higher prices could trigger wider second-round inflation effects.
Her comments reduced expectations for a more aggressive monetary policy response from the European Central Bank.
US-Iran Peace Talks Remain in Focus
Financial markets remained cautiously optimistic about peace negotiations between the United States and Iran.
Investors are monitoring whether progress toward an agreement could reduce geopolitical tensions and stabilise global energy markets following recent volatility.
A successful deal could lower energy prices and ease some of the inflationary pressure affecting the global economy.
Markets Await Key US Inflation Data
Investor attention is now shifting toward upcoming US economic reports and fresh Federal Reserve commentary.
The May Personal Consumption Expenditures Price Index is scheduled for release on Wednesday. The PCE Price Index is the Federal Reserve’s preferred measure of inflation.
US Purchasing Managers’ Index data for June is due later on Tuesday. A revised reading of first-quarter US gross domestic product will also be released on Wednesday.
These reports could provide further evidence about whether the Federal Reserve is prepared to raise interest rates again later this year.
Japanese Yen Approaches 1986 Low
The Japanese yen remained under heavy pressure, with the USD/JPY exchange rate trading near 161.6 yen per dollar.
The pair briefly reached 161.93 during the previous session. A move above 161.96 would push the yen to its weakest level against the dollar since 1986.
This has placed currency traders on alert for possible intervention by Japanese authorities.
Japan Discusses Yen Weakness With US Officials
Japanese Finance Minister Satsuki Katayama reportedly discussed recent currency volatility with US Treasury Secretary Scott Bessent on Monday.
The talks came as concerns increased over the yen’s prolonged decline and sharp movements in the foreign exchange market.
Japanese officials have repeatedly warned that they could take action if currency moves become excessive.
Previous Yen Intervention Had Limited Impact
Tokyo reportedly spent tens of billions of dollars supporting the yen between late April and early May.
However, the intervention provided only temporary relief. The currency later resumed its decline as the large interest-rate gap between Japan and the United States continued to favour the dollar.
Concerns about Japan’s fiscal spending outlook also encouraged traders to remain bearish on the yen.
The currency weakened despite the Bank of Japan raising interest rates during the previous week and signalling that further monetary policy tightening may follow.
Australian Dollar Slips Below Key Level
Elsewhere in currency markets, the Australian dollar fell by 0.1% against the US dollar.
The AUD/USD pair traded near $0.6991, remaining slightly below the closely watched level of $0.70.
