Geopolitical risks and higher US rate hike bets lift the dollar, while the yen retreats amid a negative fundamental outlook.
The US dollar strengthened against the yen as US-Iran tensions escalated, driving demand for safe-haven assets. Recent military exchanges and President Trump’s remarks on ending diplomatic engagement with Iran pushed oil prices higher and revived inflation concerns, leading to a hawkish repricing of Fed rate expectations.
Markets now price a 34% chance of a July rate hike, with year-end tightening expectations rising to 38 bps. A brief de-escalation after Trump suggested Iran sought negotiations triggered minor pullbacks, but focus may shift back to upcoming US CPI data.
The yen erased earlier gains from suspected stealth intervention as its fundamental outlook remains weak. Heightened geopolitical risks and diverging monetary policy trajectories continue to weigh on the currency.