Dollar's Back in Charge (22-26 June)

The US dollar strengthened to its highest level since May 2025 as the Fed maintained a hawkish tone, signaling that additional rate hikes remain possible despite leaving rates unchanged.

The stronger dollar weighed on major currencies, pushing the euro to a three-month low, the pound toward a weekly decline, and the yen back near levels that previously prompted intervention warnings.

Bond markets reflected diverging central bank paths. US, UK, German, and Japanese yields remained high as policymakers continued to emphasize inflation risks. Meanwhile, the Bank of Japan raised rates to 1%, its highest level since 1995, while the ECB maintained a tightening bias.

Currencies

Dollar Index: The dollar index rose to around 101, its highest level since May 2025, as expectations of additional Fed rate hikes strengthened following hawkish guidance. While a US–Iran peace deal helped ease oil prices, the Fed’s decision to keep rates unchanged while raising inflation forecasts and signaling possible tightening in 2026 remained the main driver.
Euro: The euro traded near $1.145, its weakest level since mid-March, heading for a weekly decline of around 1%. The dollar gained support from the Fed’s hawkish outlook, while the cancellation of US–Iran peace talks revived uncertainty over the Middle East ceasefire. The ECB continued to signal further policy tightening.
British Pound: The pound recovered above $1.32 but remained near a two-month low, on track for a weekly decline of more than 1% against the dollar. Strong UK retail sales were overshadowed by political uncertainty, while the cancellation of US–Iran talks revived concerns over the ceasefire. Both the BoE and Fed left rates unchanged but pointed to possible future tightening.
Japanese Yen: The yen weakened beyond 161 per dollar, approaching its lowest level since 1986 despite renewed intervention warnings from Japanese authorities. The currency has erased gains from the April 30 support operation. Fed hawkishness, a stronger dollar, and the widening policy gap between the US and Japan continued to weigh on the yen despite the BOJ’s recent rate hike to 1%.

Commodities

Inflation Fears Fail to Lift Gold

Gold fell below $4,150 per ounce as renewed US–Iran tensions and higher oil prices increased inflation concerns. Trump warned of military action if Hezbollah attacks continue and cautioned Iran over the Strait of Hormuz. Although negotiations reportedly continued despite reports of delays, the Fed’s hawkish stance and expectations of further tightening added pressure to gold.

Crude Slips Despite Negotiation Delays

Brent crude slipped below $80 per barrel, giving back earlier gains as progress in US–Iran peace negotiations improved the outlook for energy supplies. Qatar and Pakistan said both sides had agreed to a 60-day roadmap toward a final deal. Despite reports of suspended talks, negotiations continued and oil flows remained uninterrupted.

Silver Extends Decline Toward $64

Silver declined toward $64 per ounce, extending recent losses as renewed US–Iran tensions and higher oil prices fueled inflation concerns. Uncertainty surrounding negotiations, combined with expectations of tighter Fed policy, continued to pressure the metal.

Fixed Income

US 10-Year Treasury Yield: The US 10-year Treasury yield eased to 4.44%, retracing part of the previous session’s rise as traders assessed the Fed’s latest decision and Chair Kevin Warsh’s policy outlook. The Fed left rates unchanged but raised inflation forecasts and signaled potential further tightening, with nearly half of policymakers projecting a 2026 hike. The 2-year yield rose to 4.20%.
UK 10-Year Gilt Yield: UK 10-year gilt yields climbed to around 4.8%, extending their rebound amid political uncertainty and global developments. Andy Burnham’s by-election victory intensified discussion about future fiscal policy, while the cancellation of US–Iran talks supported oil prices. The BoE maintained a cautious tone, and the Fed signaled possible additional tightening.
Japan 10-Year Government Bond Yield: Japan’s 10-year bond yield rose to 2.64% after the BOJ reiterated its commitment to gradual rate increases while monitoring inflation risks. Deputy Governor Ryozo Himino pointed to strong corporate earnings and rising incomes, while the recent rate increase to 1% reinforced expectations of continued tightening.
Germany 10-Year Bund Yield: Germany’s 10-year Bund yield rose to 2.95% as higher oil prices and hawkish ECB comments weighed on bonds. Uncertainty returned after US–Iran talks were canceled, while ECB officials continued to signal further tightening, with policymakers indicating the economy could absorb higher rates.

Economic Data

US Fed Funds Rate

The Federal Reserve kept interest rates at 3.50%–3.75% for a fourth consecutive meeting in June 2026 under Chair Kevin Warsh. Policymakers remained divided on the next move, with projections ranging from additional hikes to potential cuts. Growth forecasts were revised slightly lower, while inflation expectations increased. The Fed said the economy remains resilient despite persistent inflation pressures.

Japan Interest Rate

The BOJ raised its policy rate by 25 basis points to 1.0%, the highest level since 1995, citing energy-driven inflation risks linked to the Iran conflict. One board member dissented due to economic concerns. The central bank warned inflation could exceed 2% while maintaining an accommodative stance and signaling gradual future tightening.

China Industrial Production

China’s industrial production grew 4.5% year-on-year in May, up from 4.1% in April and above the 4.3% forecast. Manufacturing and utilities strengthened, while mining growth slowed. Electronics, automotive, and machinery output expanded, helping industrial production rise 5.4% during the first five months of the year, with a monthly increase of 0.4%.

Japan Inflation

Japan’s annual inflation rate rose to 1.5% in May from 1.4% in April as the impact of energy subsidies faded. Price growth accelerated across transport, housing, clothing, household goods, recreation, and services. Food inflation slowed to 3.5%, its lowest in 18 months, while core inflation remained at 1.4%, below the BOJ’s target. The monthly CPI increased 0.4%.

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