The U.S. dollar climbed to its strongest level in more than a year on Tuesday as investors increased bets that the Federal Reserve could raise interest rates later this year, while the Japanese yen hovered close to a four-decade low against the greenback.
The dollar’s strength was driven by growing expectations of a more hawkish Federal Reserve, with traders pricing in a higher probability of further monetary tightening despite easing oil prices and reduced tensions in the Gulf region.
Fed funds futures showed markets pricing in more than an 85 percent chance of a quarter-point rate increase by September, reflecting confidence that the U.S. economy remains resilient enough to withstand tighter financial conditions.
Major financial institutions have also shifted their outlook on U.S. monetary policy. Bank of America Global Research and Deutsche Bank moved away from earlier expectations that the Federal Reserve would keep rates unchanged, now forecasting a rate increase within the year.
“Right now, the dollar is pricing in higher rates and is gaining on that,” said Tommy von Bromsen, FX strategist at Handelsbanken.
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The dollar index, which measures the currency against a basket of major peers including the euro and yen, rose to 101.25, its highest level since May 2025.
The greenback also received support from continued uncertainty in the Middle East, with investors turning to the dollar as a preferred safe-haven asset amid geopolitical risks.
The euro weakened to US$1.1395, its lowest level since August 2025, after Christine Lagarde signalled a cautious approach to inflation risks and monetary policy following a recent interest rate increase by the European Central Bank.
The British pound also slipped 0.2 percent to US$1.3223 after earlier gains linked to political developments in the United Kingdom following the resignation of Prime Minister Keir Starmer.
Sterling’s movement was influenced by uncertainty over the leadership transition, although comments from Health Minister Wes Streeting backing Andy Burnham as a potential successor helped reduce some concerns among investors.
“The uncertainty surrounding the leadership succession was weighing on the pound,” said Michael Pfister, FX analyst at Commerzbank, adding that clearer political signals had helped improve sentiment.
Other risk-sensitive currencies weakened as investors moved toward the dollar. The Australian dollar fell 0.7% to $0.6951, its weakest level since early April, while the New Zealand dollar declined 0.4% to $0.5689.
Yen Remains Under Pressure
The Japanese yen continued to struggle, trading at 161.41 per dollar after briefly weakening to 161.93 on Monday, its lowest level in two years.
A move above 161.96 would push the yen to its weakest point since 1986, raising concerns that Japanese authorities could intervene to support the currency.
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Markets are increasingly watching for signals from Tokyo as the yen’s decline raises concerns about higher import costs and inflation pressures in Japan.
“We can expect volatility when the yen is close to these levels as the market is expecting that Japan will signal intervention or even intervene outright,” von Bromsen said.
Japanese Finance Minister Satsuki Katayama held an online meeting with U.S. Treasury Secretary Scott Bessent on Monday as authorities discussed possible responses to sharp currency movements, according to a source familiar with the talks.
The discussions reportedly focused on policy options to address the yen’s weakness, including the possibility of currency intervention.
Japanese financial authorities have so far avoided giving clear signals about immediate intervention, keeping markets uncertain about whether Tokyo is prepared to act.
Analysts say the yen’s outlook will depend heavily on the divergence between U.S. and Japanese monetary policies, with higher U.S. interest rates supporting the dollar while Japan continues to manage the impact of a weaker currency.
