Dollar strength persists on rate hike expectations, yen retreats

The US dollar remained close to a more than two-month high on Thursday as markets continued to price in the possibility of further monetary tightening from the Federal Reserve, despite an interim agreement between the United States and Iran that eased some geopolitical concerns.

The Federal Reserve kept interest rates unchanged within a 3.50%-3.75% range.

The decision marked the beginning of a new policy era under Chair Kevin Warsh, who also initiated a broad review of monetary policy.

However, nearly half of policymakers now expect at least one rate increase this year amid persistent inflation concerns.

Market expectations for tighter policy strengthened further following a robust US retail sales report.

According to CME FedWatch data, Fed funds futures are now pricing in an 85% probability of a rate hike in December.

The dollar maintains strength

The dollar index, which tracks the US currency against a basket of major peers including the euro and the Japanese yen, was little changed at 100.24 on Thursday.

The index had surged 0.85% in the previous session, reaching its strongest level since March 31 and recording its biggest single-day gain in more than three months.

The euro traded marginally higher at $1.1518 after earlier touching a two-month low, while the British pound strengthened to $1.3313.

The GBP/USD pair recovered from the previous day's low near 1.3260 and moved back above the 1.3300 level during Asian trading.

However, gains remained limited due to what market participants described as a challenging fundamental backdrop.

US-Iran agreement eases market tensions

Oil prices moved lower after the United States and Iran signed an interim agreement aimed at ending the Iran conflict, reopening the Strait of Hormuz, and removing US sanctions on Iranian oil exports.

The development reduced some demand for the dollar as a safe-haven asset and improved sentiment across risk-sensitive markets.

The Australian dollar rose 0.3% to $0.70365, while the New Zealand dollar gained nearly 0.5% to trade at $0.5794.

Yen weakness triggers official response

The Japanese yen weakened to as much as 160.760 per dollar after falling to its weakest level since 2024 overnight.

The move erased gains recorded after Tokyo's currency intervention on April 30.

The renewed decline prompted another response from Japanese authorities.

Gold rebounds as oil prices fall

Gold prices recovered on Thursday, with spot prices rising more than 1% after a sharp sell-off in the previous session.

The rebound was supported by declining oil prices and expectations that energy flows through the Strait of Hormuz could normalise following the US-Iran interim agreement.

However, the outlook for bullion remains constrained by the possibility of higher US interest rates later this year.

The Federal Reserve's latest projections have revived concerns that tighter monetary policy could reduce demand for non-yielding assets such as gold.

Attention later in the day was also expected to turn to the Bank of England, which was widely anticipated to leave interest rates unchanged at 3.75% while assessing the inflation implications of the tentative truce linked to the Iran conflict.