The US dollar was on track Monday for its largest monthly gain in nearly a year, supported by rising expectations for higher interest rates and growing optimism about the US economy, while investors monitored developments in the Gulf ahead of this weeks closely watched US employment report.

The United States and Iran exchanged fresh attacks over the weekend before agreeing to halt hostilities and hold talks in Qatar on Tuesday, keeping investors cautious about the durability of the ceasefire agreement and helping support oil prices.

The euro rose 0.2% to $1.1399 after hitting a 13-month low against the US currency last week, though it remained on track for a monthly loss of 2.4%.

The US Dollar Index, which measures the greenback against a basket of six major currencies, was little changed at 101.34, remaining close to the 13-month high reached last week.

The dollar has gained against all major currencies this month, with its strongest performance coming against Scandinavian currencies and the Australian and New Zealand dollars, which have fallen between 4.7% and 7%.

Rising inflation pressures, combined with the unexpectedly hawkish start to Federal Reserve Chair Kevin Warshs tenure, have reshaped market expectations for interest rates this year, while the AI-driven rally in US equities continues to attract substantial capital inflows.

As a result, the dollar is on track to gain roughly 2.5% in June, marking its strongest monthly performance since July 2025.

This is very significant because since April of last year there has been a lot of discussion about a structural decline in the dollar, said Jane Foley, Head of FX Strategy at Rabobank.

But even if you strongly believe in that view, you have to acknowledge that there is room for a cyclical rally in the currency.

And that is exactly what is happening now. Part of it reflects the fact that expectations for Federal Reserve rate hikes were priced in more slowly than those for the Bank of England and the European Central Bank, whose outlooks shifted from the start of the war. In addition, equity markets particularly since the conflict began have seen a clear allocation shift in favor of the United States, she added.

Weekly data from the US market regulator showed investors hold their largest bullish position in the dollar against major currencies since 2019, valued at approximately $36.4 billion, according to data compiled by the London Stock Exchange.

Focus turns to the ECB Forum and US jobs data

Investors are awaiting the monthly US employment report later this week, which could provide a clearer picture of whether markets are accurately pricing the likelihood of additional Federal Reserve rate hikes this year.

Money markets currently fully price in one rate increase this year, with roughly a 50% probability of a second hike.

In other currency markets, sterling traded near $1.321, above the seven-month low reached last week, ahead of a major speech later today by Andy Burnham, one of the leading contenders to succeed Keir Starmer as prime minister.

The Japanese yen traded at 161.83 per dollar, little changed on the day and close to its weakest level in 40 years.

The Swiss franc edged higher for a third consecutive session to 0.8092, remaining near an 11-month low reached last week.

The European Central Banks annual forum begins on Monday with opening remarks from ECB President Christine Lagarde. Investors will then focus on Wednesdays key policy panel featuring Federal Reserve Chair Kevin Warsh, looking for further clues on his outlook for US interest rates and monetary policy.