Dollar Surges Ahead of FOMC Meeting on Hawkish Policy Expectations

The US dollar has recovered from its early-week losses and is now trading near year-to-date highs ahead of the Federal Reserve's policy meeting on Wednesday.

The dollar's strength comes despite a drop in oil prices, which had initially triggered a sell-off. Brent crude oil prices have fallen below $90 per barrel due to reduced tensions between the US and Iran, following diplomatic talks that may lead to an end to military strikes in the Middle East.

Market participants are still wary of a potential hawkish policy update from the Fed, which could continue to support the dollar's strength. However, MUFG Research expects the Fed to leave interest rates on hold this week, giving them more time to assess inflation risks over the summer.

Audrey Bullock, RBA Governor, has dampened speculation about faster rate hikes in Australia by reiterating that the board is prepared to act as required to achieve its mandate, including increasing the cash rate further if needed. This leaves the Australian rate market comfortable with current expectations for one more hike later this year.