US dollar held firm near multi month highs on Monday, supported by a clear repricing of US monetary policy expectations after the latest Federal Reserve meeting. Although market sentiment improved slightly following positive signals from US Iran talks in Switzerland, investors remained more focused on the interest rate outlook than geopolitical developments.
Dollar index stayed close to 100.9, backed by higher Treasury yields and weaker expectations for interest rate cuts in the near term. Markets now appear more willing to price in a scenario where US rates remain elevated for longer, especially as inflation risks persist and the Federal Reserve maintains a cautious tone on monetary policy.
According to OCBC estimates, markets have shifted in recent sessions from oil relief to Federal Reserve pressure, with expectations for additional tightening rising to around 40 basis points by year end, compared with roughly 20 basis points only a week earlier. This shift reflects growing confidence that the US central bank will not rush to ease policy before seeing clearer evidence of slowing inflation.
On the geopolitical front, Iranian comments about progress in quadrilateral talks with the United States in Switzerland helped calm part of the concerns surrounding the Middle East. However, President Donald Trump’s threat of fresh military action against Tehran kept caution present across markets. Technical discussions are expected to continue this week over a 14 point memorandum of understanding, mediated by Pakistan and Qatar.
Dollar strength was clearly reflected across major currencies. Euro slipped to $1.145 as the policy gap between European Central Bank and Federal Reserve widened, while sterling fell to $1.319 after softer UK inflation data and Bank of England’s decision to keep rates unchanged supported expectations for a prolonged pause in Britain’s tightening cycle.
This week, market attention turns to US personal consumption expenditures data, the Federal Reserve’s preferred inflation gauge. A stronger than expected reading could give dollar another boost, while a clear slowdown may ease part of the recent tightening bets.
In Asia, Japanese yen remained weak despite Bank of Japan’s 25 basis point rate hike, with USDJPY rising to 161.7 as the wide yield gap between United States and Japan continued to pressure the currency. The pair’s hold above 160 keeps the risk of Japanese intervention alive, especially as this zone has triggered action from authorities in the past.
Australian dollar also edged lower to $0.7005, staying close to the key 70 cent level ahead of inflation and labor market data. Investors are watching these figures to assess Reserve Bank of Australia’s next policy direction, while the currency also remains sensitive to developments in China, Australia’s largest trading partner.
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