Dollar holds near two-month high on Fed hike bets

The U.S. dollar remained close to a two-month high on Tuesday, supported by heightened geopolitical uncertainty in the Middle East

The U.S. dollar remained close to a two-month high on Tuesday, supported by heightened geopolitical uncertainty in the Middle East and growing expectations that the Federal Reserve may raise interest rates again before the end of the year.

Currency markets remained cautious as investors continued to monitor developments in the Middle East, where tensions between Iran and Israel have kept risk sentiment subdued despite a temporary pause in hostilities. The uncertainty has encouraged demand for safe-haven assets, benefiting the greenback against most major currencies.

Although Iran and Israel suspended direct attacks following an appeal by U.S. President Donald Trump, concerns about a broader regional conflict persist. Tehran has warned that it could resume military action if Israel continues targeting Iran-backed Hezbollah positions in Lebanon. Diplomatic efforts led by Washington to secure a long-term agreement aimed at ending the conflict have so far produced limited progress, keeping investors on edge.

The ongoing uncertainty has also contributed to elevated oil prices, adding another layer of support for the U.S. currency. Higher energy prices are seen as a potential driver of inflation, reinforcing expectations that the Federal Reserve may need to maintain a restrictive monetary policy stance for longer than previously anticipated.

In early Asian trading, the euro slipped to $1.1528 while the British pound traded at $1.3335, with both currencies hovering near their lowest levels in roughly two months. The Australian dollar, often viewed as a barometer of global risk appetite, edged lower to $0.7039, while New Zealand’s currency weakened slightly to $0.5804.

Meanwhile, the Japanese yen remained under pressure, falling to around 160.3 per dollar. The currency continues to trade near levels that have previously prompted concerns about potential intervention by Japanese authorities seeking to stabilize the exchange rate.

The U.S. Dollar Index, which tracks the greenback against a basket of major currencies, held near the 100 mark after reaching its highest level in two months during the previous trading session.

Market analysts say the dollar’s strength reflects a combination of geopolitical uncertainty and resilient U.S. economic performance. Rodrigo Catril, Senior Foreign Exchange Strategist at National Australia Bank (NAB), noted that investors remain unconvinced that recent diplomatic efforts have significantly reduced geopolitical risks.

According to analysts, strong U.S. economic indicators have further strengthened the dollar’s appeal. Last week’s robust employment data exceeded market expectations and prompted traders to increase their bets on another Federal Reserve interest-rate hike later this year.

The Chinese yuan remained largely unchanged ahead of the release of key trade figures that are expected to show a recovery in export growth during May, offering fresh insight into the health of the world’s second-largest economy.

Inflation Data Takes Center Stage

Investor attention is now turning to the upcoming U.S. consumer inflation report, which is expected to provide crucial guidance on the Federal Reserve’s policy path.

Following stronger-than-expected labor market data, money markets are increasingly pricing in the possibility of another rate increase before year-end. According to market estimates, traders currently see a significant probability that the Fed will tighten monetary policy further if inflation remains stubbornly high.

U.S. Treasury yields stayed elevated on Tuesday as investors adjusted their expectations for future interest rates. Yields on two-year government bonds hovered near their highest levels in more than a year, while the benchmark 10-year Treasury yield remained comfortably above 4.5%.

Tony Sycamore, a market analyst at IG, said a stronger-than-forecast inflation reading could reinforce concerns that the Federal Reserve is not finished with its tightening cycle.

Analysts warn that such an outcome would likely boost the dollar further while increasing pressure on equity markets, as higher borrowing costs could weigh on corporate earnings and economic growth prospects.

ECB Also in Spotlight

Beyond the United States, investors are closely watching the European Central Bank (ECB), which is widely expected to deliver another interest-rate increase this week. Policymakers in the eurozone continue to face the challenge of combating inflation, particularly energy-related price pressures, while avoiding deeper economic weakness across the region.