Japanese Yen dips despite warnings as Fed hike bets, Iran tensions lift US Dollar

• The US Dollar advances as negotiations between Washington and Tehran become more complicated following new threats from Donald Trump.
• Markets continue to increase expectations for Federal Reserve rate hikes this year, supporting US yields.
• USD/JPY trades around 161.70 on Monday, up 0.25% on the day despite renewed verbal intervention warnings from Japan.

USD/JPY advances toward 161.70 on Monday, gaining around 0.25% at the time of writing, as the US Dollar (USD) benefits from both renewed risk aversion linked to geopolitical tensions in the Middle East and stronger expectations for tighter monetary policy in the United States (US).

The weekend brought mixed developments regarding relations between the United States and Iran. Qatari mediators indicated that discussions between US and Iranian officials had made encouraging progress, with a roadmap aimed at reaching a final agreement within 60 days. However, this optimism quickly faded after US President Donald Trump threatened fresh strikes against Iran if Tehran-backed groups continued their actions in Lebanon. According to several reports, Iranian negotiators subsequently suspended talks in Switzerland in response to those comments.

This geopolitical backdrop is supporting the Greenback as investors seek safe-haven assets while uncertainty surrounding regional stability persists. The US Dollar Index (DXY) trades near 100.90 at the time of press, up 0.14% on the day after already gaining nearly 1% last week.

At the same time, the main support for the US Dollar comes from evolving monetary policy expectations. The Federal Reserve (Fed) left interest rates unchanged at its June meeting, but its updated projections were perceived as significantly more hawkish. Nine of the 19 policymakers now expect at least one rate hike this year, whereas no officials supported such a scenario in the projections released in March.

The Fed’s dot plot now points to the Federal Funds Rate reaching 3.6% by year-end, compared with 3.1% previously projected. According to the CME FedWatch tool, markets now assign a 36% chance to at least two rate hikes by the end of the year, up sharply from 13% a week ago.

Lee Hardman, analyst at MUFG, noted that the recent US Dollar rally reflects the hawkish repricing of rate expectations as well as the rebound in US Treasury yields. The bank added, however, that slower inflation driven by lower energy prices could reduce the need for additional tightening later this year.

In Japan, the Japanese Yen (JPY) remains under pressure despite repeated warnings from officials. Japan’s Finance Minister Satsuki Katayama reiterated on Monday that authorities stand ready to respond appropriately to excessive currency market moves at any time. Nevertheless, these comments have failed to halt USD/JPY’s advance, with interest rate differentials between the US and Japan continuing to favor the US Dollar.

Investors will now focus on the preliminary US PMI data and the May Personal Consumption Expenditures (PCE) Price Index later this week, both of which could influence expectations regarding the future path of Fed policy.