The recent uptick in the U.S. dollar during the North American trading session appears to have concluded a phase of position-squaring, driven by speculation about potential U.S. involvement in the Iran conflict and ahead of the Federal Reserve's policy announcement. The dollar's strength continued against some G10 currencies, especially the Swedish krona, after the Riksbank's rate cut, and the Swiss franc, amid expectations of a zero deposit rate. Emerging market currencies showed mixed trends, with Asia Pacific currencies generally weakening—except for the Chinese yuan—while Central European currencies held firm.

Asia Pacific Markets

In Japan, the yen weakened as the dollar briefly climbed above JPY145.40, marking the highest point since mid-May. Japan's May trade deficit widened significantly, fueled by declining exports and a sharp drop in imports. Moreover, core machine orders plummeted 9.1% in April, suggesting a weak start to Q2.
In Australia, the local dollar fell to its lowest since early June after strong gains earlier in the week. Attention now turns to May's jobs report, which is expected to reflect a slowdown following April’s strong performance. Market expectations have shifted toward a likely interest rate cut at the Reserve Bank of Australia’s next meeting.

European Markets

The euro struggled after failing to maintain levels above $1.16, retreating to near $1.1475 as investors reassessed positions before the Fed's decision. If it slips below $1.1470, further downside could follow. The British pound saw its largest single-day drop since April, falling over 1% to trade around $1.3425. A modest recovery followed, but the technical picture remains fragile. Although UK inflation eased slightly in May, driven by lower service sector prices and transportation costs, the Bank of England is widely expected to hold rates steady in its upcoming meeting, with a cut increasingly anticipated in August.

American Markets

The Dollar Index climbed to a four-day high despite disappointing U.S. data—May retail sales and industrial output both declined. The index remains below its 20-day average, highlighting the lack of strong follow-through. Investor focus is now on the Federal Reserve’s policy update. While no change in rates is expected, projections could be revised from two to one rate cut this year. Weakening job market data and subdued inflation have opened the door for a dovish tilt. The Fed’s balance sheet remains large, raising questions about future liquidity. Meanwhile, housing and jobless data will offer preliminary insight before the FOMC's statement.