The dollar rose in early Monday trading after the U.S. and Iran exchanged military strikes over the weekend, lifting safe-haven demand for the greenback even as currency markets weighed diverging policy signals from major central banks. The DXY dollar index gained 0.1% to 99.011, recovering from a two-week low of 98.751 reached Friday when hopes for a diplomatic deal had boosted risk appetite.
The U.S. said it struck Iranian air-defense radar and drone sites after Iran shot down an American drone, marking the latest military exchange in a conflict that has roiled global markets for months. President Donald Trump said in a Truth Social post Monday that Iran “really wants to make a deal, and it will be a good one for the U.S.” Negotiations for an agreement continue alongside the military exchanges.
A European Central Bank survey released Monday showed eurozone consumer inflation expectations were broadly steady in April. Median consumer inflation expectations for the next 12 months held at 4.0%, while five-year expectations remained at 2.4%. Three-year expectations fell slightly to 2.9% from 3.0% in March.
Consumers’ nominal income growth expectations for the next 12 months dropped to 0.8% in April from 1.2% in March, while growth expectations worsened to an anticipated economic contraction of 2.2%, compared with 2.1% in March. Expectations for the unemployment rate in 12 months’ time fell to 11.2% from 11.3%.
ING’s Chris Turner said in a note that the euro could gain modestly if elevated inflation expectations persist, potentially reinforcing views that the ECB will need to raise interest rates twice this year, in June and September. An increase in short-dated euro swap rates would be mildly supportive for the euro, although gains against the dollar could be limited given a positive U.S. economic backdrop, he said. The euro traded flat at $1.1657.
In Asia, the yen consolidated against other Group of 10 currencies in thin holiday-thinned trading ahead of Bank of Japan Governor Kazuo Ueda’s scheduled speech Wednesday. Nomura’s FX research analysts said market participants are watching Ueda’s speech for signs the BOJ may raise interest rates or adopt a more hawkish stance to avoid falling behind the curve. The BOJ’s June meeting is a major event for the yen, the analysts said.
Turner said the dollar is likely to stay near 160 yen in coming months and could rise into the 162-163 yen range. He noted that the speculative market is “far less short yen” than previously and that the Federal Reserve could be moving toward a rate hike rather than a cut. For the BOJ to reverse the recent shift in real interest-rate differentials against the yen, it would need to “deliver a very hawkish hike” and manage expectations of a policy rate heading above 1.50% next year, Turner said, adding that this “might be difficult in the current political environment.” The dollar traded 0.1% higher at 159.47 yen.
In the U.K., sterling held steady at $1.3457 after Bank of England Governor Andrew Bailey said Friday the central bank was in no rush to raise rates and would tolerate temporary above-target inflation. Markets are now pricing 35 basis points of rate increases by year-end, according to LSEG data, down from more than 80 basis points at one point. Turner said the paring of rate-rise bets has not weighed heavily on sterling, although a stronger dollar should keep the currency below $1.35.
Asian currencies traded mixed against the dollar in thin sessions thinned by holidays in several regional countries. National Australia Bank senior economist Taylor Nugent said markets’ focus “remains on the still elusive deal between the U.S. and Iran,” noting that “nothing has been finalized and headlines this morning suggest dialogue is ongoing.” The dollar rose 0.5% against the South Korean won to 1,514.70 won but fell 0.2% against the New Taiwan dollar to 31.345 New Taiwan dollars.
The Australian dollar slipped 0.1% to $0.7177. StoneX senior market analyst Matt Simpson flagged pullback risks, saying the currency’s recent rally against the dollar appears corrective on the daily chart. Unless there is decisively positive news for risk assets alongside strong Australian data and weaker U.S. data, Simpson said his preference was to fade rallies below cycle highs in anticipation of a move back toward $0.7000.