Dollar Firms as Hormuz Escalation Lifts Rate-Hike Odds — BOJ Outlook Also in Focus for JPY Crosses

The dollar index held near 101.07 — its highest since July 8 — after Iran's renewed attacks on Gulf states and the disputed Hormuz closure revived inflation concerns. USD/JPY rose 0.1% to 161.92, EUR/USD slipped to $1.1403, GBP/USD eased to $1.3383, while commodity currencies AUD/USD ($0.6942) and NZD/USD ($0.5757) each fell around 0.1%.

Fed odds shifted, not spiked: CME FedWatch now prices a 52.1% probability of two or more Fed rate hikes by December, up from 47.6% Friday — a meaningful but not dramatic repricing, reinforcing that markets see this as raising the odds of tightening rather than confirming it.

A key BOJ development for JPY crosses: Sources told Reuters the Bank of Japan is likely to raise its fiscal 2026 growth forecast at its July 31 meeting while trimming near-term inflation projections on lower oil costs — but the central bank remains focused on upside inflation risk from persistent yen weakness. Japan's wholesale prices rose 7.1% year-on-year in June as companies passed through higher import costs. The BOJ is expected to hold its policy rate at 1% this month, with most economists still penciling in a move to 1.25% by year-end.

A hawkish-leaning BOJ alongside a firming dollar could create competing forces for JPY crosses. AUD/JPY and NZD/JPY in particular, both currencies popular with regional carry-trade positioning, could experience higher volatility if the July 31 report signals a firmer timeline for the next hike.

Tuesday's U.S. CPI print and Fed Chair Kevin Warsh's testimony remain the more immediate catalysts for the dollar broadly.

Sources: Reuters, CME FedWatch