The US dollar remained strong on Monday as investors grew more optimistic about the prospects of a deal following the first round of talks between the United States and Iran. Meanwhile, the Japanese yen hovered near its weakest level in almost 40 years, while the British pound slipped after UK Prime Minister Keir Starmer announced his intention to resign.

The two mediating countries, Qatar and Pakistan, said that the United States and Iran had agreed on a roadmap toward a final agreement to end the conflict within 60 days. However, investors remained concerned about US President Donald Trump's threats to resume military action in the Middle East and Tehran's announcement that it would close the strategically important Strait of Hormuz.

Oil prices fell around 2%, with Brent crude settling near $79.1 per barrel.

Chris Weston, Head of Research at Pepperstone, said: "The physical market is still experiencing supply tightness, which should provide some support, but moves in foreign exchange and commodities will remain closely tied to developments in the energy sector."

The British pound fell 0.1% to $1.322, remaining near session lows after Labour Party leader Starmer said he would step down, opening the door for rival Andy Burnham to become Britain's seventh prime minister in ten years since the Brexit referendum.

Lee Hardman, Senior Currency Analyst at MUFG, said: "At the moment, Andy Burnham appears to be the frontrunner. He has attempted to reassure the UK government bond market that he will adhere to fiscal rules, and there are reports that he is working with highly respected economists."

He added: "That has already provided some reassurance to investors and should help limit downside risks for both sterling and UK government bonds in the near term."

Yen nears a 40-year low

At the same time, the Japanese yen remained under pressure, trading near 161.73 per dollar, close to the two-year low reached last week. A move beyond 161.96 would push the currency to its weakest level since 1986.

Japanese Finance Minister Satsuki Katayama said on Monday that authorities stand ready to respond appropriately to currency movements at any time.

Matt Simpson, Senior Market Analyst at StoneX, said: "Japan's Ministry of Finance may be tired of watching the dollar-yen rate climb toward 2024 highs, but it may also feel powerless to do much about it, as intervening against a hawkish Federal Reserve and a strong US economy could prove costly and ineffective."

The yen has already surrendered the gains it made following a round of government intervention on April 30, when Tokyo spent a record 11.7 trillion ($72.44 billion). The Federal Reserve's hawkish shift subsequently encouraged traders to increase their bets on higher US interest rates this year.

Jeremy Stretch, Head of FX Strategy at CIBC, said that even if the Bank of Japan raises rates at a faster pace, the fact that traders now expect the Federal Reserve to raise US interest rates at least once this year means the dollar is likely to remain strong.

He added: "Interest rate differentials remain particularly unfavorable, and if we continue to live in a world where US exceptionalism remains the dominant theme, then, aside from intervention risks, the path of least resistance is for the dollar to move higher against the yen."

Strong bets on a stronger dollar

Investors increased their bullish dollar positions over the past week. Data from the US Commodity Futures Trading Commission showed that speculators now hold their largest net bullish position on the dollar in 16 months, valued at nearly $30 billion.

The US Dollar Index, which measures the currency against six major peers, stood near 101 points, close to its highest level in a year.

The index has gained around 3% since the beginning of the year, supported in part by expectations that US interest rates will remain elevated for longer.