The US dollar traded near its highest level in almost two months on Monday after a strong US employment report prompted investors to increase bets that the Federal Reserve will raise interest rates later this year, while the Japanese yen continued to drift toward levels that could trigger official intervention in the foreign exchange market.

Currency market moves were relatively calm compared to the turbulence seen across global financial markets, where a sharp selloff in technology stocks spread across Asia and weighed on European equities.

The dollar maintained the gains recorded after Fridays employment report, which showed that US nonfarm payrolls increased by 172,000 jobs last month, significantly exceeding market expectations. The euro remained close to a nine-week low at $1.1525, while the British pound traded near a three-week low at $1.3344.

Jonas Goltermann, Chief Markets Economist at Capital Economics, said the US jobs report paints a picture of a labor market that continues to strengthen despite the ongoing energy price shock.

Federal Reserve meeting

He added that this combination makes further monetary tightening by the Federal Reserve later this year more likely, noting that Capital Economics now expects the Federal Open Market Committee to deliver two additional 25-basis-point rate hikes this year in response to higher energy costs and continued strength in the US labor market.

Even before the jobs report was released, investors had already been increasing expectations for higher interest rates as the global energy crisis linked to the conflict with Iran continued to fuel inflation concerns.

Weekly data from US regulators showed that investors cut their bullish euro positions to the lowest level in three months during the week ended June 4, while bearish bets against the Japanese yen increased to more than $10 billion, according to LSEG data.

The Federal Open Market Committee is scheduled to meet next week in its first gathering under Chair Kevin Warsh. Markets are currently pricing in roughly a 50% chance of a rate hike by September, which analysts say could limit excessive dollar buying in the near term.

Strategists at Barclays said upcoming factors, including shifts in risk appetite, the possibility of a US-Iran agreement, and the upcoming Federal Reserve meeting, may cap further dollar gains in the short term.

Middle East developments

In a new development in the Middle East, Israel announced that it carried out strikes against military targets in western and central Iran on Monday, despite reports that US President Donald Trump had urged Israeli Prime Minister Benjamin Netanyahu to refrain from launching additional attacks.

The developments pushed oil prices up about 5%, adding further concerns for investors already dealing with a sharp selloff in highly valued technology stocks.

Over the past two weeks, the dollar has benefited from its safe-haven status, in addition to expectations of a widening interest rate gap between the United States and other major economies, a factor that has particularly pressured the Japanese yen.

Japanese yen

The yen has now surrendered the gains achieved after Tokyo intervened in the currency market with approximately 11.7 trillion, equivalent to about $73 billion, a little more than a month ago, when the currency fell to its weakest level since July 2024 at 160.725 per dollar. The Japanese currency traded near 160.19 on Monday.

Reuters sources indicated that the Bank of Japan is expected to raise interest rates this month unless a major escalation in the Middle East conflict causes severe market disruption, while higher fuel costs resulting from the energy shock continue to increase inflationary pressures on the Japanese economy.

Sim Moh Siong, Market Strategist at OCBC, said this leaves the yen in a wait-and-see position because markets have already almost fully priced in a rate hike.

He added that any additional support for the yen from rate hike expectations will depend on whether the Bank of Japan signals a faster-than-expected pace of future interest rate increases.