The US Dollar (USD) demonstrated resilience and reversed early-week losses, trading near year-to-date highs ahead of the Federal Reserve's (Fed) monetary policy meeting scheduled for Wednesday [1][2]. Over the past seven days, the USD was the strongest against the New Zealand Dollar, appreciating by 1.14%, and also gained 1.13% against the Swiss Franc [1]. The USD Index held steady at around 101.50 in early European trading on Tuesday [1].
Market sentiment was influenced by a temporary de-escalation of military tensions between the United States and Iran, which led to a short-lived relief rally and a sharp decline in oil prices. West Texas Intermediate (WTI) crude lost about 9% on Monday and traded modestly lower at around $83.50 on Tuesday [1][4]. The drop in oil prices eased inflation concerns, contributing to lower US Treasury yields, with the two-year yield falling by approximately 7 basis points from last week's high [2][4].
Despite softer energy prices and lower yields, market participants remained cautious, positioning for a potentially hawkish Fed policy update. According to MUFG’s Lee Hardman, the stronger US Dollar ahead of the FOMC meeting reflects expectations of a hawkish stance, even as the consensus anticipates rates to be left on hold to allow more time for inflation assessment [2]. The CME FedWatch Tool indicated a 38% chance of a July rate hike and an 81.4% probability of at least a 25-basis-point increase by September, with Citadel Securities expecting the Fed to raise rates to reinforce Chairman Kevin Warsh’s inflation-fighting credibility [3].
The Swiss Franc (CHF) weakened for the seventh consecutive day, with USD/CHF trading around 0.8190, as easing safe-haven demand and US-imposed tariffs on Switzerland contributed to the move [3]. The Swiss National Bank is widely expected to keep its policy rate at 0% through 2027, with inflation projected to remain within target [3].
Gold prices moved higher on Monday, supported by lower oil prices and yields, which weighed on the US Dollar and improved the outlook for non-yielding assets. ING analysts noted that gold should remain supported if yields stay contained, but warned that any hawkish surprise from the Fed could cap further upside in the near term [4].
US equities experienced volatility, with early gains on lower oil prices reversed by a selloff in technology stocks. Nasdaq futures were down about 1% in early European trading on Tuesday [1]. The market is also awaiting the release of the Conference Board's Consumer Confidence Index for July [1].
CONCLUSION
The US Dollar's strength ahead of the Fed meeting reflects market expectations for a hawkish policy update, despite easing inflation pressures from lower oil prices and yields. Safe-haven demand for the Swiss Franc has diminished, and gold remains supported unless the Fed surprises with a more aggressive stance. Overall, markets are positioned cautiously, awaiting further guidance from the Federal Reserve.