Key Takeaways

• Dollar at 1-year peak: The DXY rose to 101.18 — its highest in over a year — driven by elevated Treasury yields and aggressive Fed repricing.
• October hike at 80% probability: CME FedWatch now assigns roughly 80% odds of a Fed move in October after last week’s hawkish meeting.
• Euro hits August 2025 low: The single currency fell after Lagarde downplayed second-round inflation risks, shifting focus to the lingering price damage from the conflict.
• Eurozone PMI contracts for third month: Private sector activity shrank again in June, compounding pressure on the euro.
• Sterling slips 0.3%: Keir Starmer’s resignation injected fresh political uncertainty into British markets.
• AJ Bell’s Coatsworth: “The market would worry about how any change in spending plans might be funded, and whether any decision to raise taxes would dampen already lacklustre economic growth.”
• Aussie dollar drops 0.8%: Fell to its weakest level since April on broad risk-off sentiment.
• Yen near 40-year low: USD/JPY trading around 161.43 — a move above 161.96 would mark the weakest yen since 1986.
• Katayama-Bessent talks: Japan’s Finance Minister held emergency discussions with the U.S. Treasury Secretary over sharp currency swings.
• BOJ hike failed to help: The yen weakened even after last week’s rate increase — the wide U.S.-Japan rate gap and fiscal concerns override tightening signals.
• Tokyo’s intervention limited: Tens of billions spent in late April and early May provided only temporary yen support.
• Iran talks provide some comfort: Investors remain cautiously optimistic on peace progress, watching for energy market stabilization.
• PCE Wednesday the pivotal release: The Fed’s preferred inflation gauge will determine whether the dollar’s rally has further room to run.
• PMI and revised GDP also due: Both will feed into the rate outlook picture.

The U.S. dollar rose to an over one-year high on Tuesday amid increased speculation over more interest rate hikes by the Federal Reserve.

The Japanese yen saw a sudden jump and steadied near its weakest levels in 40 years, trading at levels that had attracted billions in government intervention earlier this year.

The euro fell to its lowest since August 2025 after European Central Bank President Christine Lagarde downplayed risks of second-round inflation pressures, shifting investor focus from Middle Eastern de-escalation to the lingering price scars of a three-month conflict.

Fresh data showed Eurozone private sector activity shrank for a third straight month in June.

Dollar at 1-Year High as Rate Hike Bets Grow

The U.S. Dollar Index rose to 101.18, hitting an over one-year high, underpinned by elevated Treasury yields as traders repriced the path of U.S. interest rates.

Fed funds futures now assign roughly an 80% probability of an October hike, according to CME FedWatch, after last week’s meeting revealed most policymakers expect at least one move before year-end.

Sterling slipped 0.3% in volatile trade after UK Prime Minister Keir Starmer’s resignation injected fresh political uncertainty into British markets.

Meanwhile, investors remain cautiously optimistic over U.S.-Iran peace talks, watching whether progress could temper geopolitical risks and stabilize energy markets.

Attention is now turning to upcoming U.S. data and Fed commentary for further clues on the policy outlook. The May PCE price index — due Wednesday and the Fed’s preferred inflation gauge — will be closely scrutinized, alongside June PMI readings later today and a revised first-quarter GDP print mid-week.

Together, the releases will help determine whether the greenback’s rally toward fresh annual highs has further room to run.

The risk-sensitive Australian dollar fell 0.8% to its weakest level since April.

Yen Hovers Near Weakest Level Since 1986

The Japanese yen remained under pressure, with the USD/JPY pair trading around 161.43 yen after briefly weakening to 161.93 yen in the previous session. A move above 161.96 yen would push the currency to its weakest level since 1986, keeping traders on alert for potential intervention by Japanese authorities.

Japanese Finance Minister Satsuki Katayama held discussions with U.S. Treasury Secretary Scott Bessent on Monday as concerns mounted over sharp currency swings and the yen’s continued decline.

Tokyo was seen spending tens of billions of dollars in late April and early May to support the yen. But the measure provided the Japanese currency with limited support, as a wide rate gap with the United States and mounting concerns over stretched Japanese fiscal spending kept traders largely biased against the yen.

The currency weakened even after the Bank of Japan hiked interest rates last week and flagged further plans to tighten monetary policy.