The US dollar climbed to its highest level in more than a year on Thursday after the Federal Reserve's decision to keep interest rates unchanged while adopting a hawkish tone fueled expectations for further rate increases. Although the dollar edged lower today, it remains close to that peak.

The US central bank left interest rates unchanged within a range of 3.50% to 3.75% at its first meeting under new Federal Reserve Chairman Kevin Warsh, who began his tenure with a broad policy review. Nearly half of Fed policymakers now expect interest rates to rise this year as concerns over inflation continue to grow.

According to data from the London Stock Exchange Group, the federal funds futures market is now fully pricing in an interest rate hike by October. Strong retail sales data has further reinforced expectations that monetary tightening will continue.

The US Dollar Index, which measures the currency against a basket of major peers including the yen, euro, and British pound, slipped 0.1% to 100.7 points. Despite the decline, the index remains near its highest level since May 2025.

Lee Hardman, Senior Currency Analyst at Mitsubishi UFJ Financial Group, said that "the Federal Reserve's hawkish policy update threatens to trigger a powerful rally in the US dollar."

He added that "the dollar has benefited from the sharp upward revision in short-term US interest rate expectations, more than offsetting the negative impact of the US-Iran agreement announced over the weekend."

Japanese yen

The Japanese yen weakened beyond the ¥161-per-dollar level late on Thursday, approaching its weakest point in four decades and reviving speculation that Tokyo could intervene again to support the currency.

After Japanese equity markets closed on Thursday, the yen fell sharply through the ¥161 level before extending losses later in the day to ¥161.80 per dollar, its weakest level since July 2024.

A move beyond ¥161.96 per dollar would push the yen to its weakest level since 1986.

Market speculation

The currency's decline prompted fresh warnings from Japanese financial officials. Reports indicated that Japanese Finance Minister Satsuki Katayama told a recent G7 meeting that Japan is "prepared to take decisive action against speculative movements" in foreign exchange markets.

The yen remains under pressure despite more than $70 billion in intervention by Japan's Ministry of Finance in May and recent interest rate hikes by the Bank of Japan, which have pushed borrowing costs to their highest level since 1995.

According to reports, Bank of Japan Deputy Governor Ryozo Himino told parliament that the central bank is closely monitoring currency movements because of their impact on the economy and inflation.

Analysts told CNBC that intervention efforts in the foreign exchange market have not been particularly effective in curbing yen weakness because the underlying drivers are structural in nature.

These factors include elevated US Treasury yields, which continue to support the dollar, as well as the pro-growth policies pursued by Japanese Prime Minister Sanae Takaichi's administration, which has signaled a preference for maintaining relatively accommodative monetary conditions.

While yen weakness has helped support Japan's exports and economic growth, it has also raised concerns about imported inflation and the erosion of household purchasing power.

Gold prices fell more than 2% in European trading on Friday, extending losses for a third consecutive session and heading toward a third straight weekly decline, pressured by broad strength in the US dollar against a basket of global currencies.

The Federal Reserve's latest meeting, chaired by Kevin Warsh for the first time, was more hawkish than markets had expected. Policymakers warned that inflation risks remain elevated and reaffirmed the central bank's commitment to bringing inflation back to target, boosting expectations that restrictive monetary policy will remain in place for longer and increasing the likelihood of at least one interest rate hike before the end of the year.

The Price

• Gold prices today: Gold fell more than 2.0% to $4,122.06, from an opening level of $4,209.35, after reaching an intraday high of $4,213.71.

• At Thursday's settlement, gold prices lost 1.15%, marking a second consecutive daily decline, due to rising US dollar levels and Treasury yields.

Weekly performance

So far this week, which officially concludes with today's settlement, gold prices are down approximately 2.5%, putting the metal on track for a third consecutive weekly loss.

US dollar

The US Dollar Index rose 0.3% on Friday, extending gains for a third straight session and reaching a 13-month high of 101.10 points, reflecting continued broad-based strength in the US currency against a basket of global currencies.

As is well known, a stronger US dollar makes dollar-denominated gold bullion less attractive to holders of other currencies.

The advance comes as investors continue to favor the dollar as the most attractive available investment, particularly after the Federal Reserve's latest meeting, which was more hawkish than markets had anticipated.

Federal Reserve

At the conclusion of its regular monetary policy meeting in the United States, and in line with most expectations, the Federal Reserve left interest rates unchanged on Wednesday for a fourth consecutive meeting.

The Federal Open Market Committee voted unanimously (12-0) to keep the benchmark federal funds rate within a range of 3.50% to 3.75%, the lowest level since September 2022.

Monetary policy statement

New Federal Reserve Chairman Kevin Warsh introduced a major revision to the monetary policy statement by removing language that had previously indicated a bias toward future rate cuts, signaling a more cautious and restrictive stance.

The Fed also changed its description of inflation in the official statement, describing it as "elevated" rather than "somewhat elevated," while reaffirming its unwavering commitment to returning inflation to its 2% target over the medium term.

The FOMC stated that it will continue to monitor the impact of incoming data on the economic outlook and remains prepared to adjust monetary policy at any time should risks emerge that threaten its objectives.

Economic projections

The Federal Reserve's quarterly Summary of Economic Projections released on Wednesday included several important revisions:

• Economic growth: The Fed lowered its US growth forecast for this year from 2.4% to 2.2%. For 2027, growth was left unchanged at 2.3%, while the 2028 forecast was raised from 2.1% to 2.2%.

• Headline inflation: The Fed raised its headline inflation forecast for this year to 3.6%, up from 2.7% in the March projections. The 2027 forecast was increased to 2.3% from 2.2%, while the 2028 forecast remained unchanged at 2.0%.

• Core inflation: The Fed left its core inflation forecast unchanged at 2.7% for this year, in line with the March projections. Core inflation for 2027 remained at 2.2%, while the 2028 forecast was unchanged at 2.0%.

• Target interest rate: The Fed raised its target rate projection for this year from 3.50% to 3.75%, increased the 2027 projection from 3.25% to 3.50%, and left the 2028 projection unchanged at 3.25%.

• Members unanimously removed all previous projections that had indicated interest rate cuts this year. Nine of the eighteen policymakers now expect at least one rate hike before the end of 2026.

Kevin Warsh

New Federal Reserve Chairman Kevin Warsh said during his first press conference that the central bank is fully prepared to use all available monetary tools to ensure price stability, stressing that the fight against inflation is not over and that the US economy remains resilient enough to withstand the current restrictive policy stance.

Key comments from Warsh included:

• Inflation remains well above the 2% target due to the Iran war.

• I expect proposed revisions, including changes to the Summary of Economic Projections.

• Additional adjustments are coming and may warrant press conferences.

• Financial market prices are the most important source of information used by central bankers.

US interest rates

• Following the meeting, according to CME Group's FedWatch Tool, market pricing for the Federal Reserve to leave rates unchanged at its July meeting fell from 91% to 72%, while the probability of a 25-basis-point rate hike increased from 9% to 28%.

• Market pricing for the Federal Reserve to keep rates unchanged at its December meeting dropped from 45% to 15%, while expectations for a 25-basis-point rate increase rose from 55% to 85%.

• To reassess those expectations, investors are closely monitoring upcoming US economic data as well as comments from Federal Reserve officials.

Gold outlook

Tim Waterer, Chief Market Analyst at KCM Trade, said: "Gold's rally on the back of the US-Iran peace agreement was short-lived. A recovering dollar, driven by the Federal Reserve's new hawkish direction under Kevin Warsh, quickly captured market attention."

Waterer added: "The new Fed chairman's firm stance has effectively neutralized the geopolitical momentum, reminding markets that monetary policy remains the primary driver."

SPDR Fund

Holdings of the SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, increased by 7.42 metric tons on Thursday, marking a second consecutive daily increase and the largest daily rise since April 17. Total holdings climbed to 1,020.49 metric tons, the highest level since June 4.

The euro fell in European trading on Friday against a basket of global currencies, extending its losses for a third consecutive session against the US dollar and hitting its lowest level in three months. The decline comes amid broad selling pressure across major currencies and growing investor demand for the US dollar as the most attractive available investment, particularly following the hawkish Federal Reserve meeting, which significantly strengthened expectations for a US interest rate hike in December.

After the European Central Bank reiterated at its latest meeting that it is not committed to a predetermined path for monetary policy or interest rates, investors are awaiting additional key economic data from the euro area to reassess expectations for European interest rates.

The Price

• Euro exchange rate today: The euro fell 0.3% against the dollar to $1.1423, its lowest level since March 16, from today's opening level of $1.1458. The session high was recorded at $1.1466.

• The euro ended Thursday down about 0.4% against the dollar, marking its second consecutive daily loss, following the outcome of the Federal Reserve's first monetary policy meeting under Kevin Warsh.

US dollar

The US Dollar Index rose 0.3% on Friday, extending gains for a third consecutive session and reaching a 13-month high of 101.10 points, reflecting continued broad-based strength in the US currency against a basket of major and minor currencies.

The advance comes as investors continue to favor the dollar as the most attractive available investment, especially after the Federal Reserve's latest meeting, which was more hawkish than markets had anticipated.

At its first monetary policy meeting under Kevin Warsh, the Federal Reserve raised its inflation and policy rate forecasts for the current year, signaling that inflationary pressures remain persistent. The Summary of Economic Projections also showed that 9 of the 18 policymakers expect at least one interest rate increase before the end of 2026.

Following the meeting, according to CME Group's FedWatch Tool, market pricing for the Federal Reserve to leave interest rates unchanged at its July meeting fell from 91% to 72%, while the probability of a 25-basis-point rate hike increased from 9% to 28%.

Market pricing for the Federal Reserve to keep rates unchanged at its December meeting also declined from 45% to 15%, while expectations for a 25-basis-point rate increase rose from 55% to 85%.

European interest rates

• Reports: The European Central Bank is considering pausing monetary policy normalization in July if energy prices remain at current levels.

• Amid declining oil prices, money markets reduced the probability of a 25-basis-point ECB rate hike in July from 50% to 30%.

• Money market pricing for a 25-basis-point ECB rate increase in September also declined from 70% to 50%.

• Investors are awaiting further economic data from the euro area, particularly inflation, unemployment, and wage figures, to reassess the above expectations.

The Japanese yen rose against a basket of major and minor currencies in Asian trading on Friday, attempting to recover from a two-year low against the US dollar. The currency is on track to post its first gain in six sessions, supported by bargain buying activity and growing expectations that Japanese authorities may intervene to support the local currency as it approaches levels not seen since 1986.

Data released in Tokyo today showed that Japan's core inflation rate remained steady in May, in line with market expectations, despite ongoing concerns over rising energy prices.

The data comes as a deputy governor of the Bank of Japan warned of the risk of inflation exceeding the official target over the medium term, keeping the possibility of further monetary policy tightening on the table in the coming period.

The Price

• Japanese yen exchange rate today: The dollar fell 0.25% against the yen to ¥160.99, from today's opening level of ¥161.37, after reaching a session high of ¥161.42.

• The yen ended Thursday down about 0.5% against the dollar, marking its fifth consecutive daily loss. It touched a two-year low of ¥161.81 as continued demand for the US currency persisted amid its appeal as the most attractive available investment.

Japanese authorities

Japanese authorities are closely monitoring movements in the local currency market, particularly as the yen nears its weakest levels in 40 years after breaking above the key ¥160-per-dollar threshold. The level is widely viewed as a red line that could prompt Japanese authorities to intervene once again to support the currency.

Sources told Reuters that Tokyo intervened several times in late April and early May to halt the yen's decline. At the time, the exchange rate reached ¥160.72 per US dollar, its weakest level since July 2024.

Japanese officials have warned against excessive volatility in the yen and indicated that authorities could take decisive action against disorderly moves in the foreign exchange market.

Finance Minister Satsuki Katayama stated that the government is "prepared to take appropriate action" if currency markets experience excessive or speculative movements.

Views and analysis

Tony Sycamore, market analyst at IG, said: "We believe Japan's Ministry of Finance will likely defend the ¥161.95 level, using spending power similar to what we saw in April and May, around ¥11.7 trillion."

Sycamore added: "That means they would be using roughly 11-12% of Japan's total foreign exchange reserves within a relatively short period of time, for only a limited impact on the currency market."

He further explained: "At that stage, authorities would need to be more selective about any future interventions, ensuring they preserve both flexibility and credibility while retaining sufficient reserves to address potential future pressures."

Core inflation

Data released in Tokyo today showed that Japan's core consumer price index rose 1.4% in May, matching market expectations for a 1.4% increase. The index had also risen 1.4% in April, marking the slowest pace of growth since March 2022.

The figures clearly indicate easing inflationary pressures on Bank of Japan policymakers, reducing the likelihood of another Japanese interest rate hike this year.

Bank of Japan deputy governor

Bank of Japan Deputy Governor Ryozo Himino said on Friday that inflation could exceed the bank's 2% target and pointed to the cost of delaying interest rate increases, reaffirming the central bank's commitment to continuing to raise borrowing costs.

Japanese interest rates

• The Bank of Japan raised its benchmark interest rate by 25 basis points on Tuesday to 1.0%, the highest level since 1995, in another historic step toward normalizing monetary policy in the world's fourth-largest economy.

• Bank of Japan Deputy Governor Shinichi Uchida said the central bank will continue to raise interest rates gradually in response to developments in economic activity and prices, noting that policymakers will not rush into abrupt monetary tightening.

• Economic surveys indicate that the most likely and baseline scenario is for the Bank of Japan to raise interest rates by an additional 25 basis points in December.

• Market pricing for a quarter-point rate increase at the Bank of Japan's July meeting currently remains below 25%.

• Investors are awaiting additional data on inflation, unemployment, and wage growth in Japan to reassess those expectations.