Dollar firms on hawkish Fed bets, oil rebound; yen near 40-year low

The U.S. dollar held firm on Tuesday as traders positioned for a more hawkish Federal Reserve and oil prices ​rebounded following steep losses, while the yen flirted with a four-decade low, Reuters reported.

U.S. Treasury yields remained elevated after ‌a jump on Monday, with those on interest-rate-sensitive 2-year notes hovering near a 16-month high as traders braced for the prospect of rate hikes later this year.

Fed funds futures are pricing in 75% odds of a rate hike by September, while BofA Global Research and Deutsche Bank abandoned prior ​forecasts for steady policy and now expect the Fed to raise rates within the year, citing economic resilience.

"The dollar is ​holding firm on rising yields and hawkish Fed bets," with limited guidance from the Fed fuelling ⁠volatility, said Sim Moh Siong, FX strategist at OCBC.

The bank now expects a modestly stronger dollar amid rising risks for ​tighter U.S. monetary policy, revising a previous call for the currency to be rangebound, he added.

Additional 2% to 3% upside for the ​dollar index — a gauge of the currency against six peers — is likely if there is a clear break above the high of the past 14 months at 101.97, he added.

The dollar index , which measures the greenback against a basket of currencies including the yen and the euro, was ​a shade higher at 101.01, not far from the one-year high of 101.13 hit late last week.

Also supporting the greenback, ​oil prices rebounded on Tuesday after a sharp fall the previous session over progress in U.S.-Iran peace talks, as investors awaited clearer signs of progress in ‌restoring ⁠crude flows through the Strait of Hormuz.

The euro last traded at $1.1423 , hovering near a three-month low after European Central Bank President Christine Lagarde played down second-round inflation worries.

The British pound traded at $1.3246, largely steadying after Prime Minister Keir Starmer resigned and paved the way for an orderly transfer of power.

The risk-sensitive Australian and New Zealand dollars were each down roughly 0.1% to $0.6991 and $0.5704, respectively.