Dollar pauses on peace hopes, but Fed hike bets remain intact

Dollar gains on new strikes, pauses on Israel-Hezbollah ceasefire

The US dollar gained against all the other currencies on Monday on renewed concerns that peace efforts in the Middle East could collapse again. That said, the world’s reserve currency stabilized today, perhaps as the announcement of a limited Israel-Hezbollah ceasefire revived some truce hopes.

Despite last week ending with headlines about a memorandum of understanding (MoU) between the US and Iran, the two nations exchanged airstrikes over the weekend, with Iranian media reporting on Monday that their country has stopped discussing a deal with the US due to the incessant hostility from Israel in Lebanon.

Renewed anxiety that the Strait of Hormuz is unlikely to reopen anytime soon sent oil prices and the US dollar higher, while it pushed gold lower. However, today, market participants are experiencing some countermoves, not only due to the Israel-Hezbollah ceasefire, but also due to US President Trump’s optimism that the US and Iran will eventually find common ground.

Investors still expect the Fed to raise interest rates

Having said all that though, investors remain largely convinced that the Fed’s next move is likely to be a rate hike. According to Fed fund futures, a 25bps rate hike remains fully penciled in for March 2027, while there is a decent 60% chance of it being delivered by December.

With geopolitical uncertainty remaining elevated, it seems that market participants are reluctant to scale back their tightening bets. Even if there is further progress, inflation is likely to remain elevated for a while longer. Oil is trading at much higher levels than a year ago, while the 6% US PPI rate for April increases the risk of high CPI rates in the months to come.

Today, dollar traders may pay attention to the US JOLTS job openings for April ahead of Friday’s nonfarm payrolls as they try to figure out whether the state of the labor market could allow a rate hike sooner.

Yen remains pressured as Katayama softens her tone

Despite the greenback pausing today, dollar/yen continues to march higher, erasing nearly all the recent intervention-related losses and getting even closer to the psychological round figure of 160.00.

Today, Japanese finance minister Katayama said that they retain the stance of being ready to respond in the FX market if needed, once again warning against excessive speculative yen moves. However, this time, the tone was much softer than the alert on April 30 ahead of the actual intervention episode. Back then, Katayama said that timing for “decisive action” was approaching.

Perhaps traders thought that she is now willing to tolerate higher levels and that’s why they continued pushing the pair higher. That said, there is a large volume of options with strike price at 160.00 expiring today and thus, some profit taking near that round number cannot be ruled out.

As for the broader picture, for any intervention episode to have the desired effect, strong coordination with the US may be needed, which may be difficult nowadays as the world’s largest economy is facing its own inflation issues and may have little incentive to support a weaker dollar.

What’s more, the BoJ may need to appear more decisive in raising interest rates. There is a strong 60% probability of a 25bps rate increase at the upcoming meeting on June 16, but this alone may not be enough. The Bank may need to signal that more tightening is on the cards before the turn of the year.

Stocks stay AI-driven, gold returns above $4,500

On Wall Street, all three of the major indices hit fresh record highs yesterday, once again paying little attention to what’s going on in the Middle East. However, stock futures are pointing to a retreat today, perhaps as momentum in chipmakers is cooling after May’s strong rally. Perhaps investors are considering some profit taking before joining again later at more attractive levels.

Gold pulled back yesterday, but it is rebounding again today, returning above the $4,500 mark. The precious metal continues to trade in a consolidative manner, remaining above the 200-day moving average, but below the 50- and 100-day ones. For the bulls to regain full control, a concrete agreement between the US and Iran may need to be sealed.