FOREX-Dollar hovers near two-month high on Fed hike bets; Japan warns on yen

The US dollar hovered near a two-month high after the Federal Reserve's hawkish stance and rate hike expectations, driven by inflation concerns and a strong retail sales reading.

The U.S. ‌dollar ​hovered close to a two-month high on Thursday after a hawkish hold from the Federal Reserve triggered bets on rate hikes, while yen weakness drew verbal warnings from Japanese officials.

The U.S. central bank held rates steady ‌in a 3.50% to 3.75% range as new chair Kevin Warsh opened his era in charge with a sweeping policy review. Nearly half of policymakers now expect a hike this year as inflation concerns mount. The Fed funds futures market has priced in an 85% chance of Fed tightening in December, according to CME ‌FedWatch, with a strong retail sales reading further adding to hawkish bets.

The euro last traded roughly flat at $1.15 and sterling was 0.1% lower at $1.328, ‌with both trading around two-month lows. The dollar index, which measures the greenback against a basket of currencies including the yen, euro and sterling, was very slightly stronger at 100.39.

It surged 0.85% to the strongest level since March 31 in the previous session, its biggest single-day jump in over three months. "The Fed’s hawkish policy update is threatening to trigger a bullish break out for ⁠the U.S. ​dollar," said Lee Hardman, senior currency analyst ⁠at MUFG.

"The U.S. dollar has derived support from the sharp adjustment higher for short-term U.S. rates," he said, "more than offsetting the dampening impact from the U.S.-Iran deal announcement over the weekend." Oil ⁠prices eased on Thursday after the U.S. and Iran signed an interim agreement that would end the Iran war, reopen the Strait of Hormuz and waive U.S. sanctions on ​Iranian oil, sapping some strength from the safe-haven greenback.

The risk-sensitive Australian dollar was up 0.2% at $0.7030 on Thursday. "Markets are examining whether the ⁠Strait of Hormuz can be reopened for free passage," said Kimmy Tong, global market and FX strategist at Everbright Securities International.

"Until that is confirmed, sentiment favouring a stronger dollar should continue to ⁠dominate" ​considering the Fed's tightening bias, she said. The Japanese yen weakened to as low as 160.760 after hitting its weakest since 2024 at 160.795 on Wednesday, wiping out gains made after Tokyo's intervention on April 30. The dollar was last flat against the currency at 160.64 yen.

The renewed slide prompted ⁠a fresh response from the government, with officials reiterating their readiness to support the currency. "We are ready to respond appropriately to currency moves as needed at ⁠any time," Chief Cabinet Secretary Minoru ⁠Kihara told a press conference on Thursday when asked about the yen's decline.

Elsewhere, the Bank of England looks on course to keep interest rates unchanged at 3.75% later on Thursday as it assesses what a tentative truce in the ‌Iran war means for inflation.