Dollar holds near 2-month high as markets weigh rate hikes, Iran diplomacy

The U.S. dollar maintained its position near a two-month high against a basket of major currencies, buoyed by mounting expectations that the Federal Reserve will deliver another interest rate hike next month. The dollar index, a key measure of its strength, hovered at 103.54, not far from its recent peak of 104.1.

Global Central Banks Signal Further Tightening

Market sentiment has been shaped by surprise moves from other G7 central banks. Unexpected rate increases by the Reserve Bank of Australia and the Bank of Canada this week signaled that the global fight against persistent inflation is far from over. This has bolstered the case for the Fed to abandon its anticipated pause and resume tightening. According to CME's FedWatch tool, traders are now pricing in a 70% probability of a rate hike in July, a significant increase from around 50% just a week ago. The Canadian dollar notably strengthened to its highest level in over a month following its central bank's decision.

Geopolitical Rumors Briefly Rattle Markets

Currency and commodity markets experienced a brief bout of volatility following reports of a potential interim nuclear agreement between the United States and Iran. The news initially sent oil prices lower and caused the dollar to dip against safe-haven currencies like the Japanese yen and Swiss franc. However, the dollar quickly recovered its footing after both the White House and Iranian officials dismissed the reports as false, underscoring the market's current focus on fundamental monetary policy drivers.

China's Economic Slowdown Adds to Complex Picture

Contrasting with the hawkish sentiment elsewhere, fresh data from China revealed mounting economic headwinds. Consumer prices rose at their slowest pace in over two years, while factory gate deflation deepened, raising concerns about the strength of the country's post-pandemic recovery. These figures could pressure Beijing to introduce new stimulus measures. The offshore yuan remained largely flat against the strong dollar, trading at 7.1205.

Future Outlook

Investor attention is now squarely focused on the release of U.S. inflation data next week. The report will be a critical input for the Federal Reserve's upcoming policy decision and has the potential to either solidify or undermine the market's current expectation for a July rate increase. The dollar's near-term trajectory will likely be determined by whether the inflation figures confirm the need for further monetary action.