2026-06-28 · generated by deepseek-v4-flash

Dollar Holds Firm as Fed Rate Cut Hopes Fade, Geopolitical Risks Mount

The dollar remains supported as hawkish Fed commentary and strong jobs data extinguish near-term rate cut hopes, while escalating Iran-US tensions and Middle East disruptions boost safe-haven demand. CNY gains on policy easing.

Dollar Strengthens on Hawkish Fed Stance

The dollar index held near recent highs as markets digested a chorus of hawkish signals from the Federal Reserve. Fed's Goolsbee reiterated that positive inflation progress would lead to rate cuts but such progress has not yet materialized, emphasizing that rate cuts are not the only option. Bank of America dramatically revised its outlook, stating it now expects the Fed to hold rates until at least 2027, citing persistent inflation and a strong labor market. The “Bond King” Jeff Gundlach warned that hope for a 2026 rate cut may be completely extinguished, advising a shift into cash and real assets. The April nonfarm payrolls report showed 115,000 new jobs, well above expectations, though February and March payrolls were revised down by a combined 16,000. The University of Michigan 1-year inflation expectation eased to 4.5% in May, slightly below forecasts, but remains elevated enough to keep the Fed on hold.

Geopolitical Tensions Drive Safe-Haven Flows

Renewed geopolitical instability in the Middle East added to the dollar's safe-haven appeal. Reports emerged of sporadic clashes between Iranian armed forces and U.S. vessels in the Strait of Hormuz, while Iran is drafting a legal framework to regulate the strategic waterway. The UK announced it will deploy the destroyer HMS Dragon to the region for escort missions. President Trump said he expects a response from Iran on the latest peace proposal “soon,” but Iran's foreign ministry indicated it is still weighing its options. Meanwhile, President Putin stated that the Russia-Ukraine conflict is moving toward an end, which could improve broader risk sentiment in the medium term. These developments kept oil prices volatile and reinforced demand for the greenback.

CNY Strengthens on Policy Support

The offshore yuan (CNH) strengthened by 116 pips to 6.7971 per dollar, while the onshore yuan (CNY) closed at 6.8005, up 63 pips from the previous session. The moves were supported by the implementation of two pilot foreign exchange facilitation policies in the Qianhai Free Trade Zone, with the first transactions already executed. Separately, Chongqing reported cross-border RMB goods trade settlement of 85.05 billion yuan in Q1 2026, ranking first among central and western Chinese regions. These measures underscore China's commitment to capital account liberalization and support the yuan's internationalization. Broader sentiment was also aided by data showing Jiangsu's foreign trade grew 17.2% y/y in Q1, beating expectations.

Euro and Yen Under Pressure

The euro remained under pressure as key ECB officials flagged risks from AI to financial infrastructure and from energy prices to inflation. ECB's Escrivá noted AI risks are prompting a review of financial infrastructure resilience, while Nagel pledged necessary action to control energy-driven inflation. No specific EUR/USD level was triggered, but the pair stayed below recent resistance as the dollar rally continued. USD/JPY remained elevated, supported by the widening rate differential amid the Fed's hawkish stance and the Bank of Japan's persistent ultra-loose policy. The yen's safe-haven status was undermined by the overall strength of the dollar, though heightened Middle East tensions could at times trigger short-covering in yen crosses.