Dollar at One‑Year High Amid Rising Fed Hike Expectations

At 16:50 ET (20:50 GMT) the U.S. dollar index was up 0.4 % to 101.39, its highest level since mid‑May 2025, reflecting a firming greenback as markets processed the Federal Reserve’s unexpectedly hawkish stance from the previous week.

According to the CME FedWatch tool, the probability of a 25‑basis‑point rate hike at the Fed’s July monetary‑policy meeting surged to over 36 % from just 8.5 % a week earlier. Traders also lifted expectations for a halt‑point hike and higher rates at the December meeting relative to a week ago.

The shift follows the Fed’s Summary of Economic Projections released last Wednesday, which presented a markedly more hawkish dot plot: at least half of the Federal Open Market Committee participants now anticipate rate hikes this year to counter inflationary pressure from surging oil prices linked to the Iran conflict. The dot plot now projects at least one quarter‑point hike in 2026, replacing the earlier outlook of at least two quarter‑point cuts.

Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management, noted that prior to the meeting only one hike had been priced in, but the market now expects the first hike by the October meeting and a second fully priced in by March 2027. He added that while historically Fed tightening precedes economic contraction, the current level of expected tightening alone may not be sufficient to derail growth, though it incrementally raises risk.

In the bond market, the Treasury yield curve flattened over the week, a pattern that historically precedes inversion and signals concern over overly restrictive policy. The spread between the rate‑sensitive 2‑year Treasury yield and the benchmark 10‑year yield narrowed as the 2‑year yield rose and the 10‑year fell.

Investors also awaited Tuesday’s flash U.S. purchasing‑managers‑index (PMI) data for June and Wednesday’s revised estimate of the U.S. first‑quarter core personal consumption expenditures (PCE) price index, the Fed’s preferred inflation gauge. S&P Global reported that the U.S. headline composite PMI rose to 52.2 in June from 51.5 in May, marking a five‑month high. The services PMI component increased to 51.3 in June from 50.7 in May, a four‑month high that beat consensus estimates, while the manufacturing output index reached 57.7 in May, the fastest growth rate since July 2021.

Middle‑East Nuclear Inspection Narrative

President Donald Trump claimed on Truth Social that Iran had “fully and completely agreed to highest level Nuclear inspections long into the future,” asserting that this would guarantee “Nuclear Honesty.” He further stated that, absent such agreement, no further negotiations would occur and that he had allowed the Hormuz Strait to remain open with no naval blockade. U.S. Vice President JD Vance said peace talks in Switzerland resulted in Iran agreeing to invite International Atomic Energy Agency inspectors, a claim denied by Iran’s state media and foreign‑ministry spokesperson Esmaeil Baqaei. When questioned, Trump reiterated that Iran’s denial was incorrect.

Yen Pressure and Japanese Policy Response

The Japanese yen continued to weaken, trading at 161.58 per U.S. dollar by 16:45 ET (20:45 GMT). A move above 161.96 would mark the weakest level since 1986, keeping market participants alert to possible intervention by Tokyo authorities. Finance Minister Satsuki Katayama discussed the currency’s sharp swings with U.S. Treasury Secretary Scott Bessent on Monday. Japan had spent tens of billions of dollars in late‑April and early‑May to support the yen, but the intervention offered limited relief amid a wide rate gap with the United States and concerns over stretched Japanese fiscal spending. The yen’s decline persisted even after the Bank of Japan raised interest rates last week and signaled further tightening plans.

Other Currency Movements

The euro slipped 0.4 % to $1.1379, while the British pound fell 0.4 % to $1.3201 following UK Prime Minister Keir Starmer’s resignation, which injected fresh political uncertainty into British markets.

Contributors: Pranav Kashyap, Roushni Nair, and Jaiveer Shekhawat