In Asian trading on Monday the U.S. dollar was largely unchanged, while most regional currencies traded within tight bands as persistent uncertainty around the Middle East and unsettled expectations about U.S. interest rates kept investors cautious.
Trading activity was lighter than usual due to public holidays in Japan and Mainland China. The Japanese yen extended gains following reports that Tokyo intervened in currency markets last week to support the yen after USD/JPY breached the 160 level.
News that the Australian dollar was near its strongest level in nearly four years drew attention ahead of a widely anticipated decision by the Reserve Bank of Australia. The RBA is expected to raise its policy rate by 25 basis points on Tuesday - a move seen as the third such increase this year - as it attempts to blunt a projected resurgence of inflation in late 2025.
Broader trading showed limited response to statements by U.S. President Donald Trump that the United States would mount an operation to assist ships transiting the Strait of Hormuz, and that indirect discussions with Iran were ongoing. These comments did not produce a marked shift in currency markets.
Dollar profile and Fed commentary
The dollar index and related futures were steady just above the 98-point mark on Monday. Minneapolis Federal Reserve President Neel Kashkari commented on the potential economic fallout from a protracted conflict with Iran, saying that a longer war would raise the risk of higher inflation and constrain the Fed's ability to provide clear forward guidance.
Kashkari said he could not signal forthcoming rate cuts and flagged the possibility that the Fed might need to raise rates because of the uncertainty stemming from the conflict. He was among an unusually large group of dissenters at last week's Federal Reserve meeting, having opposed the central bank's easing bias; the meeting itself was interpreted as being more hawkish than markets had anticipated.
Market participants remain focused on how the Iran conflict might influence oil prices and inflation, both of which have provided underpinning support to the dollar. Attention this week is also squarely on U.S. nonfarm payrolls for April, due on Friday, for fresh indications on the health of the U.S. economy.
Regional moves and central bank expectations
The Australian dollar held near four-year highs as markets priced in a 25 basis point RBA increase on Tuesday. That anticipated move would reverse a brief easing cycle undertaken by the central bank in 2025. Central bank commentary has warned that inflationary pressures could be exacerbated by shocks from the Iran conflict, a factor that has been factored into policy expectations.
Analysts expect the RBA to adopt a pause after the expected hike, with the bank thought to have enough policy room to assess how geopolitical-driven inflationary pressures unfold.
Elsewhere in Asia, currency moves were modest. USD/KRW traded about 0.2% lower, USD/SGD slipped around 0.1%, and USD/INR was flat, holding just below 94 rupees after record highs in April. The offshore Chinese yuan, USD/CNH, eased roughly 0.1%. The Japanese yen outperformed regional peers, with USD/JPY down about 0.5% amid the reported intervention.
Overall, the market tone was cautious and subdued, with geopolitical developments and U.S. monetary policy commentary continuing to set the near-term agenda for currency traders.