Dollar Firms on Hawkish Fed Bets, Oil Rebound; Yen Nears 40-Year Low

The U.S. dollar maintained its strength on Tuesday, driven by market expectations of a more hawkish Federal Reserve and a rebound in oil prices following recent declines. Meanwhile, the Japanese yen hovered near a four-decade low, intensifying concerns over currency fluctuations.

U.S. Treasury yields remained high, with the 2-year note yield approaching a 16-month peak. Traders are bracing for potential interest rate hikes later this year, as Fed funds futures indicate a 75% probability of a rate increase by September. Major financial institutions like BofA Global Research and Deutsche Bank have revised their forecasts, now anticipating Fed rate hikes within the year due to the economy's resilience.

"The dollar is holding firm on rising yields and hawkish Fed bets," noted Sim Moh Siong, FX strategist at OCBC. He added that limited guidance from the Fed is contributing to market volatility. OCBC now forecasts a moderately stronger dollar, revising a previous outlook for a range-bound currency, citing increased risks of tighter U.S. monetary policy.

The dollar index, which tracks the greenback against a basket of major currencies, saw a slight increase, trading near a one-year high. The rebound in oil prices also provided support to the dollar, as investors await clearer indications on the restoration of crude oil flows through the Strait of Hormuz.

The euro traded near a three-month low against the dollar, while the British pound remained largely steady. The Australian and New Zealand dollars experienced modest declines. The Japanese yen last traded at 161.59, briefly touching a two-year low of 161.93. A breach above 161.96 would mark the yen's weakest level since 1986. Japanese Finance Minister Satsuki Katayama reportedly met with U.S. Treasury Secretary Scott Bessent to discuss policy responses to the weak yen, including potential currency intervention.

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The dollar is holding firm on rising yields and hawkish Fed bets.