The U.S. dollar strengthened against most Asian currencies on Monday. Higher Treasury yields and renewed tensions in the Middle East increased demand for the greenback.
At the same time, investors reduced expectations for an early Federal Reserve interest-rate cut. Markets are now preparing for this week’s key U.S. inflation figures.
Middle East Tensions Support the U.S. Dollar
Fresh missile and drone exchanges between the United States and Iran over the weekend increased geopolitical concerns.
Investors remain focused on the Strait of Hormuz, a critical route for global oil and energy supplies. Any disruption in the region could push energy prices higher and add to inflationary pressure.
As a result, the dollar remained supported despite continued uncertainty about the wider geopolitical outlook.
The U.S. Dollar Index gained approximately 0.2% to reach 101.16. Benchmark U.S. Treasury yields also moved higher as traders adjusted their positions ahead of major economic and political events.
Markets are closely watching Federal Reserve Chair Kevin Warsh’s congressional testimony. Investors are also waiting for Tuesday’s June Consumer Price Index report.
The inflation data could provide new clues about the Federal Reserve’s next policy decision and the timing of potential interest-rate cuts.
Yen Outlook Improves Despite Dollar Strength
The Japanese yen remained in focus after recording a sharp rebound on Friday.
The recovery followed comments from Japanese Finance Minister Satsuki Katayama. She said she wanted to encourage public pension funds, including the Government Pension Investment Fund, to increase their exposure to Japanese financial assets.
Her remarks fuelled speculation that major institutional investors could gradually move some of their overseas holdings back into domestic markets.
Such a shift could create a long-term source of demand for the yen, which has faced significant selling pressure during the past year.
The USD/JPY pair rose approximately 0.4% to around 162.3 on Monday. The move recovered part of Friday’s decline.
However, the pair remained below last week’s high of about 162.7. Concerns that Japanese authorities could intervene in the currency market continued to limit further gains.
Pension Fund Changes Could Boost Yen Demand
Tony Sycamore, a market analyst at IG, said Katayama’s comments could become an important turning point for the yen.
However, this would depend on whether the government’s proposal leads to actual changes in pension fund investment allocations.
Sycamore estimated that a moderate shift towards Japanese assets could generate approximately JPY12 trillion in yen purchases.
A more aggressive portfolio adjustment could produce flows of up to JPY30 trillion. This level of demand could provide meaningful support for the Japanese currency.
Bank of Japan May Raise Growth Forecast
Separately, Reuters reported that the Bank of Japan may increase its fiscal 2026 economic growth forecast later this month.
The central bank is also expected to continue highlighting upside risks to inflation.
A weaker yen has increased the cost of imported goods. Meanwhile, resilient investment linked to artificial intelligence has supported economic activity and partially offset the impact of lower energy prices.
These factors could influence the Bank of Japan’s monetary policy outlook in the coming months.
Stronger Dollar Pressures Asian Currencies
Most other Asian currencies weakened as the stronger U.S. dollar encouraged investors to reduce their exposure to regional markets.
The South Korean won faced particularly heavy pressure. USD/KRW climbed approximately 0.6% to around 1,507.
The move followed severe volatility in South Korea’s stock market. The KOSPI briefly triggered a circuit breaker after falling by more than 8% during the trading session.
Continued foreign selling of major semiconductor companies also weighed on the won. SK Hynix and Samsung Electronics were among the stocks affected by investor outflows.
Australian Dollar Weakens as Chinese Yuan Holds Steady
The Australian dollar also declined against the greenback, falling by approximately 0.4%.
In contrast, China’s yuan remained relatively stable. Both the onshore and offshore yuan recorded only modest moves against the dollar.
Investors avoided taking large positions ahead of several important Chinese economic reports due this week.
Markets Await China Trade and GDP Data
China is scheduled to publish its June trade figures on Tuesday.
Later in the week, investors will receive second-quarter gross domestic product data, retail sales figures and industrial production numbers.
These reports could provide a clearer picture of the health of the Chinese economy and influence sentiment towards Asian currencies.
Singapore will also release its preliminary second-quarter GDP estimate. In addition, markets are preparing for the Bank of Korea’s upcoming interest-rate decision.
Together, these economic releases and central-bank developments could drive significant volatility across Asian foreign-exchange markets.
