Dollar near two-week lows as rate-hike bets recede, embattled yen in focus

Analysts say Fed guidance will be closely watched for policy clues

The US dollar steadied near a two-week low on Monday as investors scaled back bets on a Federal Reserve rate hike this year, while the yen remained pinned near a 40-year low, keeping investors nervous about what Tokyo might do next.

The euro EUR= was at $1.1435, not far from its strongest level in two weeks, while sterling GBP= last bought $1.3351. The dollar index =USD, which measures the US currency against six other units, was at 100.9 in early trading.

The yen JPY= was at 161.57 per US dollar, just off the 1986 low of 162.84 it touched last week, as traders remain nervousabout possible intervention after a sudden surge in buying briefly lifted the currency on Thursday.

The South Korean won KRW= firmed a touch on the first day of its historic 24-hour onshore spot dollar-won trading. It was fetching 1,534 per dollar.

Dollar on Back Foot

The US dollar clocked its biggest weekly drop last week since April after the US payrolls report showed job growth slowed sharply in June, easing market expectations of a rate hike from the Fed.

OCBC strategists though said the decline in the unemployment rate points to a still-tight labour market and should help keep Fed tightening expectations intact.

"The broader USD outlook remains constructive," they said, maintaining their view of a moderate 2-3% appreciation in the dollar in the second half of 2026.

The dwindling oil prices have helped ease some of the inflationary concerns, with investor focus this week on the minutes of the Fed's June meeting to help gauge policymakers' thinking around the rates outlook.

Strategists at Commonwealth Bank of Australia said the minutes may be shorter or provide less insight than usual given Fed Chair Kevin Warsh's view the central bank has provided too much guidance in the past.

Yen Vigil in Place

The yen remains firmly in the spotlight, hovering near a 40-year low as the threat of official intervention keeps traders on edge, even though analysts doubt any move by Tokyo would deliver lasting support.

Intervention risk is more likely to trigger bouts of volatility and temporary corrections than a lasting reversal in USD/JPY, according to OCBC strategists.

"Without a meaningful shift in underlying macro fundamentals, verbal warnings and outright intervention alone are unlikely to change the broader direction of the pair," they said.

Investors are also concerned about Japanese officials abandoning their habit of telegraphing risks, instead signalling a more targeted campaign to squeeze speculators and raise the cost of betting against the yen.

"The market knows it risks intervention," said Marc Chandler, chief market strategist at Bannockburn Global Forex. "We continue to see signs in the options market that some large pools of capital have bought short-dated dollar puts to protect long dollar positions in the case of intervention."