The US dollar reached its highest level in over a year on Tuesday as traders anticipated a more hawkish stance from the Federal Reserve, despite a slight dip in oil prices due to easing tensions in the Persian Gulf. The yen strengthened after nearing a 40-year low.
Futures on the federal funds rate — an instrument reflecting market expectations of future changes in the Fed’s key rate — currently indicate over 85% probability of a quarter-point rate hike by September. Meanwhile, BofA Global Research and Deutsche Bank have revised their previous forecasts of stable policy, now expecting the Fed to raise rates within the year, citing economic resilience.
“The dollar is currently pricing in higher rates and rising on this backdrop,” said Tommy von Bromssen, a currency strategist at Handelsbanken. He added, “It is supported by the fact that the conflict in the Middle East is not fully resolved. There is still significant uncertainty that supports the dollar.”
The dollar index, which measures the US dollar’s exchange rate against a basket of currencies, including the yen and the euro, rose to 101.25, the highest level since May 2025.
Euro and sterling movements
The euro last traded at $1.1395, the lowest level since August 2025, after European Central Bank President Christine Lagarde on Monday downplayed concerns about secondary effects of inflation (when price increases in one sector trigger increases in others), hinting at a balanced approach to policy following the rate hike earlier this month.
The British pound fell by 0.2% to $1.3223 on Tuesday, slightly declining after rising the day before following the resignation of Prime Minister Keir Starmer. Health Minister Wes Streeting, a potential leadership candidate, backed Andy Burnham as Starmer’s successor, paving the way for an orderly transfer of power.
“One of the factors weighing on sterling was uncertainty about the change in leadership,” said Commerzbank currency analyst Michael Pfister. “With Streeting’s willingness to support Burnham, this uncertainty is likely to remain in the past, allowing the pound to strengthen.”
The risk-sensitive Australian dollar fell by 0.7% to $0.6951, its weakest level since early April. The New Zealand dollar dropped by 0.4% to $0.5689.
Yen fluctuates at low
The Japanese yen last traded at 161.41 after briefly weakening to a two-year low of 161.93 late on Monday as the US dollar extended its gains. Exceeding the 161.96 per dollar mark would bring the yen to its weakest level since 1986.
“We can expect volatility as the yen approaches these levels, as the market expects Japan to signal or even directly intervene,” said von Bromssen of Handelsbanken.
Japanese Finance Minister Satsuki Katayama held an online meeting with US Treasury Secretary Scott Bessent late on Monday, a Reuters source reported, amid growing concerns about sharp fluctuations in exchange rates. The meeting focused on policy measures in response to the historically weak yen, potentially including currency intervention. Japanese financial authorities have kept markets guessing about possible currency intervention, and the lack of clear signals indicates a change in communication tactics.
Source: Yahoo