Key Takeaways

• Dollar holds near peak: The DXY was little changed in Asian trading after climbing to its strongest level in roughly two months overnight.
• Israel-Lebanon ceasefire: Washington confirmed a deal contingent on Hezbollah halting hostilities — providing some Middle East relief.
• But tensions persist: Iranian missile attacks on Kuwait and Bahrain and U.S. strikes on Qeshm Island kept caution elevated.
• ADP beats: U.S. employers added 122,000 jobs in May — above the 117,000 forecast — signaling continued labor market resilience.
• ISM services surges: The index rose to 54.5 in May from 53.6 in April, indicating steady expansion.
• ISM prices-paid alarm: The inflation component jumped to its highest level in nearly four years — reinforcing fears of persistent price pressures.
• Fed easing bets fade further: Strong economic data is prompting markets to scale back expectations of imminent Fed rate cuts.
• Nonfarm payrolls Friday: The May jobs report is the week’s main event and a key Fed policy input.
• Yen near danger zone: USD/JPY last traded at 159.97 — just below the 160 level that has previously triggered Tokyo intervention.
• Intervention warnings issued: Japanese policymakers issued fresh warnings on Wednesday.
• BOJ’s Ueda turns hawkish: The governor said the BOJ would need to consider rate hikes if upside inflation risks outweigh growth concerns.
• Yield differential weighs on yen: Widening U.S.-Japan yield gap continues to pressure the currency despite BOJ tightening expectations.

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The U.S. dollar held near a two-month high on Thursday after sharp gains in the previous session, driven by escalating Middle East tensions and expectations of higher-for-longer Federal Reserve interest rates.

The U.S. Dollar Index was little changed in Asian trading after climbing to its strongest level in roughly two months overnight.

Israel-Lebanon Ceasefire Provides Respite

Washington said on Wednesday that Israel and Lebanon had agreed to implement a ceasefire deal, although the agreement depends on Hezbollah halting its hostilities.

However, fresh hostilities this week — including reported Iranian missile attacks on Kuwait and Bahrain and U.S. strikes on Iran’s Qeshm Island near the Strait of Hormuz — stoked continued caution.

The U.S. dollar drew additional support from stronger-than-expected U.S. economic data released on Wednesday. Private payrolls processor ADP reported that U.S. employers added 122,000 jobs in May, signaling continued labor market resilience.

Meanwhile, the Institute for Supply Management’s services index rose to 54.5 in May from 53.6 in April, indicating steady expansion in the sector.

Investors also focused on the inflation component of the ISM survey, with the prices-paid gauge jumping to its highest level in nearly four years. The data reinforced concerns that inflation pressures remain elevated, prompting markets to further scale back expectations for imminent Fed easing.

Attention now turns to Friday’s closely watched U.S. nonfarm payrolls report for further clues on the Fed’s policy path.

Yen Hovers Near 160/Dollar; Intervention Risks Remain

The Japanese yen’s USD/JPY pair last traded at 159.97 yen — hovering just below the closely watched 160-yen level — keeping traders alert for potential intervention from Tokyo authorities.

Policymakers had issued fresh intervention warnings on Wednesday.

Bank of Japan Governor Kazuo Ueda said on Wednesday that policymakers would need to consider raising interest rates if upside inflation risks become more significant than risks to economic growth.

Japan’s currency has come under renewed pressure from widening yield differentials with the United States, although expectations of further BOJ policy tightening have helped limit losses.