On Monday (May 18), the US dollar index initially fluctuated and rose to around 99.41 before encountering resistance and falling back. In the afternoon, it continued to weaken and broke below the intraday average line. At the end of the day, it experienced a sharp drop, reaching a low of around 99.05. Overall, it showed a clear trend of rising and falling back, dominated by bears.

Last Friday, the US dollar continued its upward trend, closing strongly and achieving its strongest weekly performance in two months. Its gains covered most non-US currencies, making it the best-performing currency in the week. The renewed tensions in the Middle East completely shattered market expectations for the possible reopening of the Strait of Hormuz. As one of the world's most important oil shipping routes, the change in expectations regarding the strait's passage directly triggered a sharp rise in international oil prices, with a single-day increase of approximately 4%. Entering the new week, both the US dollar and oil prices maintained a strong start before experiencing some pullback. However, the combination of market risk aversion and expectations of rising commodity prices may further solidify the US dollar's safe-haven advantage.

Recent statements from US and Iranian officials indicate that despite multiple rounds of negotiations and numerous peace proposals, and with the current ceasefire agreement barely holding, the core differences between the two countries remain significant and unlikely to be bridged in the short term. Iran has explicitly stated its "complete distrust" of the US, believing its previous negotiating attitude lacked sincerity. Iran will only consider returning to the negotiating table if the US demonstrates a truly pragmatic negotiating stance and takes concrete actions. Meanwhile, US President Trump has publicly warned that US patience with Iran has run out, reiterating that Iran must not be allowed to possess nuclear weapons, a statement that further escalates regional tensions.

The situation has escalated beyond mere verbal exchanges into new hostile actions: a drone suddenly attacked a nuclear power plant in the UAE, causing no large-scale casualties or serious damage to facilities, but it has triggered widespread vigilance among Middle Eastern countries; at the same time, Saudi Arabia's air defense forces successfully intercepted three other incoming drones, the origin of which is still unclear, but it has undoubtedly exacerbated the already tense situation in the Middle East.

Yields surge, fueling expectations of a Fed rate hike

Coupled with last week's US inflation data far exceeding market expectations and the outbreak of a new round of tensions in the Middle East, US Treasury yields surged, with the 10-year Treasury yield climbing to its highest level since February 2025. This rise in yields further increased the attractiveness of dollar assets, drawing global funds back to the dollar market. Against this backdrop, investors have increased their bets on a Federal Reserve rate hike, and expectations for a rate hike continue to rise. According to data from the federal funds rate futures market, the market has now fully priced in the possibility of a 25 basis point rate hike by the Fed in March, while the probability of a rate hike in January is as high as 90%. Furthermore, the probability of a Fed rate hike this year is approximately 70%, suggesting that the timing of a rate hike may be further brought forward compared to previous expectations.

Considering all current factors, the upside risks for the US dollar remain, and a significant pullback is unlikely in the short term. The persistently high oil prices are likely to further push up global inflation, particularly in the US, thus accelerating the Federal Reserve's decision to raise interest rates, as controlling inflation is one of the Fed's core policy objectives. Even if international oil prices stabilize in the future, a decline in inflation will still take considerable time—because year-on-year inflation data needs to be compared with price levels in the same period last year, and oil prices were significantly lower then, resulting in a base effect that makes it difficult for inflation to fall rapidly in the short term. If subsequent economic data further confirms this trend, Fed officials may feel an urgency to raise interest rates sooner, further supporting a stronger dollar.

Yen on the verge of intervention

Despite recent foreign exchange interventions by Japanese authorities and repeated public statements from both the US and Japan promising to jointly curb speculation in the foreign exchange market and stabilize the yen's exchange rate, the yen has depreciated against the dollar for the sixth consecutive day, with a cumulative depreciation of over 1%, clearly demonstrating the yen's weakness.



Currently, the USD/JPY exchange rate has once again entered the key range of 158.00-160.00, which is precisely the intervention warning range set by Japanese Finance Minister Katayama. Katayama has frequently stated publicly that if the yen's exchange rate continues to fluctuate significantly and adversely affects the Japanese economy, the Japanese authorities are prepared to take decisive action to intervene in the foreign exchange market if necessary. This means that the risk of intervention for the yen remains high. However, the market generally believes that a single intervention action is unlikely to fundamentally change the yen's weak position. For intervention to have a substantial effect, the Bank of Japan must simultaneously launch a series of interest rate hikes to narrow the interest rate differential between the yen and the dollar.

According to data from Japan's overnight index swaps (OIS), the market expects a 68% probability of the Bank of Japan raising interest rates by 25 basis points at its June monetary policy meeting, while the probability of another rate hike before December is approaching 100%. If tonight's Japanese GDP data is strong and core CPI data shows that domestic inflation in Japan is clearly sticky, market expectations for a rate hike by the Bank of Japan will further intensify, and the probability of a rate hike may rise further.

The pound was dragged down by political pressure as key data awaited release.

The pound also faced significant selling pressure this week, experiencing a slight decline. This trend was not only due to the passive depreciation pressure from the strengthening dollar, but also, and perhaps more importantly, the escalating political uncertainty within the UK. Currently, calls for Prime Minister Starmer's resignation are growing louder, with the opposition and some members of the public dissatisfied with his performance, believing that his measures in economic governance and social welfare have failed to meet expectations. This political turmoil has further exacerbated market anxieties about the pound.

Currently, market speculation about the political landscape following Starmer's departure is increasing. Most investors believe that Starmer's successor may adopt a more accommodative fiscal policy to boost the economy and win public support. This expectation has directly led to a sharp rise in UK government bond yields, further weakening the pound's appeal. This week, the UK will release several key economic data points, including the March employment report on Tuesday, CPI inflation data on Wednesday, and retail sales data on Friday. These data will directly reflect the current economic situation and inflation level in the UK. Even if these data are strong, further supporting expectations of interest rate hikes by the Bank of England in the coming months, it will be difficult to effectively stop the pound's decline. After all, the market generally expects the Bank of England to raise interest rates by only 66 basis points before the end of 2026, limiting the room for further rate hikes and making it difficult to offset the negative impact of a stronger dollar and political uncertainty. The pound will continue to face downward pressure.

Inflation concerns triggered a stock market correction and a drop in gold prices.

In the US stock market, all three major Wall Street indexes closed lower on Friday, with the Nasdaq Composite Index, dominated by technology stocks, experiencing the largest decline, falling by more than 1%. The pullback in tech stocks was mainly dragged down by inflation concerns and rising expectations of interest rate hikes. Investors worried that rate increases would raise corporate financing costs and squeeze profit margins. Meanwhile, US stock index futures indicated a continued decline at the open today, reflecting a spreading pessimistic sentiment in the market. From the current market sentiment, inflation concerns have finally outweighed the market's optimistic expectations for a strong earnings season. The previously surging AI boom will face its biggest test this earnings season this week – industry benchmark Nvidia will release its latest earnings report after the market closes on Wednesday. Its performance will directly impact the AI sector and even the entire technology sector, thus determining the future direction of the US stock market.

Gold prices also saw a significant decline on Friday, breaking through the key support level of $4,640 per ounce, which has now become a significant resistance level. Prices subsequently fell to around $4,510 per ounce and temporarily stabilized. Looking ahead, continued global inflation concerns, rising US Treasury yields, and a strengthening US dollar will continue to exert downward pressure on gold prices, making it unlikely that the $4,510 per ounce support level will hold for long. Once gold prices break below this support level, it will open up further downside potential, potentially moving towards the $4,345 per ounce range, which currently coincides with the 200-day exponential moving average and represents a significant medium- to long-term support level for gold.