The US dollar climbed to its highest level in more than a year on Tuesday as traders increasingly positioned for a more hawkish Federal Reserve policy outlook. The move came despite a modest decline in oil prices as tensions in the Gulf region eased, while the Japanese yen hovered near its weakest level in four decades.

Federal funds futures are now pricing in more than an 80% probability of an interest rate hike by September. Major financial institutions, including Bank of America Global Research and Deutsche Bank, have abandoned their previous forecasts for a steady policy stance and now expect the Federal Reserve to raise rates this year, citing the continued strength of the US economy.

"The dollar is currently reflecting expectations for higher interest rates, and it is gaining strength as a result," said Tommy von Brömsen, currency strategist at Handelsbanken.

He added: "The dollar is also benefiting from the fact that the conflict in the Middle East has not been fully resolved, leaving a significant degree of uncertainty that continues to support the US currency."

Euro and pound remain under pressure

The US Dollar Index, which measures the currency against a basket of major peers including the euro and yen, edged up to 101.13 points, its highest level since May 2025.

The euro fell to $1.1414, its weakest level since March, after European Central Bank President Christine Lagarde downplayed concerns about a second wave of inflation.

Meanwhile, sterling traded at $1.3234, slipping slightly on Tuesday after gaining in the previous session following the resignation of British Prime Minister Keir Starmer.

UK Health Secretary Wes Streeting, who had been viewed as a potential leadership contender, endorsed Andy Burnham as Starmer's successor, paving the way for a smoother leadership transition.

"One of the factors weighing on sterling had been uncertainty surrounding the leadership succession," said Commerzbank currency analyst Michael Pfister.

"With Streeting prepared to back Burnham, that uncertainty appears to be fading, allowing the pound to regain some strength," he added.

The Australian dollar, often viewed as a risk-sensitive currency, fell 0.8% to $0.6945, its weakest level since early April. The New Zealand dollar also declined about 0.5% to $0.5684.

Yen nears weakest level since 1986 amid intervention concerns

The Japanese yen traded at ¥161.48 per dollar after briefly weakening to a two-year low of ¥161.93 on Monday as the US currency continued to strengthen against major peers.

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

"Volatility can be expected when the yen approaches these levels because the market anticipates that Japan may signal potential intervention or even carry out direct intervention," said von Brömsen of Handelsbanken.

A Reuters source said Japanese Finance Minister Satsuki Katayama held an online meeting with US Treasury Secretary Scott Bessent late Monday amid growing concerns over sharp currency market movements.

The discussions focused on possible policy measures to address the yen's historic weakness, including the possibility of intervention in the foreign exchange market.

Japanese financial authorities continue to keep markets guessing about the likelihood of intervention, with no clear signals suggesting any change in their communication strategy regarding the currency.

Gold prices fell more than 2.0% in European trading on Tuesday, resuming losses that were temporarily halted yesterday and hitting their lowest level in two weeks. The metal slipped back below the $4,100-per-ounce mark as a stronger US dollar, supported by aggressive Federal Reserve expectations, continued to pressure prices.

With markets heavily pricing in the possibility of a US interest rate hike this year, particularly after the Federal Reserve's latest hawkish meeting under Kevin Warsh, investors are awaiting additional decisive clues this week regarding the path of US monetary policy.

The Price

• Gold prices today: Gold fell 2.4% to $4,090.91, its lowest level since June 11, from an opening level of $4,191.75. The session high was recorded at $4,198.49.

• At Monday's settlement, gold gained 1.9%, posting its first advance in four sessions as part of a technical rebound and amid lower global oil prices.

US dollar

The US Dollar Index rose 0.2% on Tuesday, extending gains for a second consecutive session and reaching a 13-month high of 101.19 points, reflecting continued broad-based strength in the US currency against a basket of major and minor peers.

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

The advance is being driven by demand for the dollar as the most attractive available investment, particularly after the Federal Reserve's latest hawkish projections, which significantly boosted expectations for at least one US interest rate increase this year.

This has outweighed the negative impact of fading safe-haven demand following the conclusion of the first round of US-Iran negotiations in Switzerland, which produced a 60-day roadmap aimed at reaching a final agreement between the two sides.

US-Iran negotiations

• Technical negotiations officially began this week in Switzerland, with separate working groups established to discuss the nuclear file, economic sanctions, and security in the Strait of Hormuz, as part of efforts to draft a final agreement within 60 days.

• The United States has already issued a temporary 60-day license allowing the sale and export of Iranian oil, marking the most significant practical step toward sanctions relief in years.

• Reports indicate that Iran has shown a greater willingness to cooperate with inspectors from the International Atomic Energy Agency.

• A direct communication channel has been activated in the Strait of Hormuz to prevent military confrontations or maritime incidents that could threaten oil tanker traffic.

• US Vice President JD Vance said that discussions with Iranian officials in Switzerland have established a solid foundation for a final peace agreement.

US interest rates

• Chicago Federal Reserve President Austan Goolsbee said that with the labor market remaining stable, policymakers are focused on determining whether elevated inflation will persist or gradually ease as the impact of higher tariffs fades and if a resolution to the Middle East conflict is achieved.

• According to CME Group's FedWatch Tool, market pricing for the Federal Reserve to leave interest rates unchanged at its July meeting currently stands at 68%, while the probability of a 25-basis-point rate hike is 32%.

• Market pricing for the Federal Reserve to keep rates unchanged at its December meeting currently stands at 14%, while the probability of a 25-basis-point rate increase is 86%.

• 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 has received some support from lower oil prices this week, but it has not enjoyed similar support from the US dollar, which continues to strengthen amid expectations of Federal Reserve rate hikes."

SPDR Fund

Holdings of the SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, increased by 1.71 metric tons on Monday, bringing total holdings to 1,022.20 metric tons, the highest level since June 4.

The euro fell in European trading on Tuesday against a basket of global currencies, extending its losses for a second consecutive session against the US dollar and moving closer to a three-month low, as investors continue to favor the US currency as the most attractive available investment.

To reassess expectations for European interest rates, investors are awaiting a fresh batch of key economic data from the euro area. The closely watched June readings for the major sectors of the European economy are scheduled for release throughout the day.

The Price

• Euro exchange rate today: The euro fell 0.1% against the dollar to $1.1419, from an opening level of $1.1428. The session high was recorded at $1.1432.

• The euro ended Monday down 0.3% against the dollar, resuming losses that had paused on Friday during a rebound from a three-month low of $1.1418.

US dollar

The US Dollar Index rose 0.1% on Tuesday, maintaining gains for a second consecutive session and moving closer to a 13-month high, reflecting continued strength in the US currency against a basket of major and minor peers.

The advance is being driven by demand for the dollar as the most attractive available investment, particularly after the Federal Reserve's latest hawkish projections, which significantly strengthened expectations for at least one US interest rate increase this year.

This has outweighed the negative impact of declining safe-haven demand following the conclusion of the first round of US-Iran negotiations in Switzerland, which produced a 60-day roadmap aimed at reaching a final agreement between the two sides.

US-Iran negotiations

• Technical negotiations officially began this week in Switzerland, with separate working groups established to discuss the nuclear file, economic sanctions, and security in the Strait of Hormuz, as part of efforts to draft a final agreement within 60 days.

• The United States has already issued a temporary 60-day license allowing the sale and export of Iranian oil, marking the most significant practical step toward sanctions relief in years.

• Reports indicate that Iran has shown a greater willingness to cooperate with inspectors from the International Atomic Energy Agency.

• A direct communication channel has been activated in the Strait of Hormuz to prevent military confrontations or maritime incidents that could threaten oil tanker traffic.

European interest rates

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

• Money market pricing for a 25-basis-point ECB rate hike in July remains stable at around 30%.

• To reassess those expectations, investors are awaiting the release of June data on the major sectors of the European economy throughout today's session.

Euro outlook

According to Economies.com forecasts, if the economic data comes in stronger than market expectations, the probability of an additional ECB rate hike later this year will increase, which could support a recovery in the euro against a basket of global currencies.

The Japanese yen edged higher in Asian trading on Tuesday against a basket of major and minor currencies, attempting to recover from a two-year low against the US dollar as bargain-buying activity emerged at lower levels.

The yen's proximity to its weakest levels in four decades has prompted Japanese authorities to intensify efforts to support the currency and curb excessive foreign exchange market movements. Japanese Finance Minister Satsuki Katayama held an online meeting with US Treasury Secretary Scott Bessent to discuss potential policy measures for addressing the yen's historic weakness.

The Price

• Japanese yen exchange rate today: The dollar fell less than 0.1% against the yen to ¥161.48, from an opening level of ¥161.56. The session high was recorded at ¥161.64.

• The yen ended Monday down 0.2% against the dollar, touching a two-year low of ¥161.93, close to its 40-year low of ¥161.95.

Japanese authorities

Japanese authorities continue to closely monitor currency market movements as the yen approaches 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 renewed intervention to support the currency.

Intensified efforts

Japanese Finance Minister Satsuki Katayama held an online meeting with US Treasury Secretary Scott Bessent late on Monday amid growing concerns over sharp currency fluctuations.

According to Reuters sources, the discussions focused on proposed measures to address the yen's historic weakness, including the possibility of intervention in the foreign exchange market.

Katayama reiterated on Monday that government authorities are fully prepared to take decisive action and intervene directly in the currency market at any time to protect the yen from speculative movements.

Views and analysis

Matt Simpson, Senior Market Analyst at StoneX, said: "Japan's Ministry of Finance may be concerned about the US dollar rising against the yen to its highest level of 2024."

He added: "The ministry may also feel unable to do much about it, as intervening against a hawkish Federal Reserve and strong US economic data could prove costly and ineffective."

Japanese interest rates

• Economic surveys indicate that the most likely baseline scenario is for the Bank of Japan to deliver an additional 25-basis-point interest rate increase in December.

• Market pricing for a quarter-point rate hike 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.