The U.S. dollar maintained its strength on Tuesday as traders adjusted their positions in anticipation of a more hawkish Federal Reserve. Meanwhile, oil prices experienced a rebound after significant declines, and the yen approached a four-decade low. U.S. Treasury yields sustained their elevated levels following a notable increase on Monday, with yields on the interest-rate-sensitive 2-year notes lingering close to a 16-month peak as market participants prepared for the potential of rate hikes in the upcoming months. Fed funds futures indicate a 75% probability of a rate hike by September. Meanwhile, BofA Global Research and Deutsche Bank have revised their earlier projections for stable policy, now anticipating that the Fed will increase rates within the year, attributing this shift to economic resilience. “The dollar is ​holding firm on rising yields and hawkish Fed bets,” with limited guidance from the Fed fuelling ⁠volatility, said Sim Moh Siong.

The bank now anticipates a modestly stronger dollar in light of increasing risks associated with tighter U.S. monetary policy, adjusting a prior forecast that suggested the currency would remain rangebound, he added. Additional 2% to 3% upside for the dollar index — a gauge of the currency against six peers — is likely if there is a clear break above the high of the past 14 months at 101.97, he added. The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, was a shade higher at 101.01, not far from the one-year high of 101.13 hit late last week. Additionally bolstering the dollar, oil prices experienced a rebound on Tuesday following a significant decline in the prior session due to advancements in U.S.-Iran peace negotiations, as investors anticipated more definitive indications of progress in reinstating crude flows through the Strait of Hormuz. The euro last traded at $1.1423, hovering near a three-month low following comments from European Central Bank President Christine Lagarde, who downplayed concerns regarding second-round inflation effects.

The British pound traded at $1.3246, largely steadying following the resignation of Prime Minister Keir Starmer, which facilitated an orderly transfer of power. The risk-sensitive Australian and New Zealand dollars experienced a decline of approximately 0.1%, settling at $0.6991 and $0.5704, respectively. The Japanese yen last traded at 161.59 after briefly weakening to a two-year low of 161.93 late on Monday as the greenback extended broad gains. A break above 161.96 would position the yen at its weakest level since 1986. Japanese Finance Minister Satsuki Katayama conducted an online meeting with U.S. Treasury Secretary Scott Bessent late on Monday, according to a source.

The meeting concentrated on policy responses to the historically weak yen, potentially encompassing currency intervention. Japanese financial authorities maintained an air of uncertainty regarding potential currency intervention, as the absence of definitive signals indicates a possible alteration in their communication strategies. “The market is ⁠now watching ​closely for signs that Japanese authorities will step in to defend the 161.95 ​level in the sessions ahead,” wrote Tony Sycamore. “We think they are likely to intervene and try and hold the line at least ​temporarily,” he said, adding that such action was unlikely to have a lasting impact.