Dollar Slips Ahead of Key U.S. Jobs Data as Fed Rate Outlook, ECB, and Iran Talks Shape Forex Markets

The U.S. dollar weakened on Monday after posting two consecutive weeks of gains that pushed it to its highest level since mid-May 2025, as investors shifted their attention to a busy week of U.S. labor market data that could influence the Federal Reserve’s next interest rate decision.

The U.S. Dollar Index, which measures the greenback against six major currencies, fell 0.3% to 101.11 after climbing roughly 1.6% over the previous two weeks. The decline also reflected improving investor sentiment, with global equities rebounding from last week’s losses after concerns over the Middle East eased.

Risk appetite improved after President Donald Trump said Iran had requested a meeting with U.S. officials in Qatar, raising hopes for renewed diplomatic engagement and reducing demand for the dollar’s traditional safe-haven appeal.

The dollar’s recent rally had been fueled by expectations that the Federal Reserve could keep monetary policy tighter for longer following stronger inflation data. The Fed’s preferred inflation gauge reached its highest annual level since October 2023, while headline inflation recorded its strongest yearly increase since April 2023. However, both figures matched market expectations, leading traders to slightly reduce expectations for additional Fed rate hikes as falling oil prices eased inflation concerns.

Attention now turns to several key economic reports that could reshape market expectations. Investors will monitor the April Job Openings and Labor Turnover Survey (JOLTS) on Tuesday, followed by the ADP private payrolls report on Wednesday and the highly anticipated May nonfarm payrolls report on Thursday.

Interactive Brokers Senior Economist José Torres said stronger-than-expected labor market data could reinforce a more hawkish Federal Reserve by highlighting continued strength in employment despite elevated inflation. He noted that economists broadly expect job openings to decline, meaning any upside surprise could trigger increased volatility across currency and bond markets. Conversely, weaker employment figures could support expectations that the Fed may eventually adopt a more dovish stance.

In Europe, the European Central Bank’s annual forum in Sintra, Portugal, also attracted market attention. ECB President Christine Lagarde defended the central bank’s recent interest rate increase, rejecting suggestions that it was merely an “insurance hike.”

Lagarde explained that the ECB acted because both headline and core inflation were projected to remain above the central bank’s 2% target through 2027 unless monetary policy tightened. According to the ECB’s analysis, leaving interest rates unchanged would have allowed inflation to remain above target into 2028.

Following her remarks, the euro strengthened 0.4% against the U.S. dollar to trade near $1.1424, while the British pound also gained 0.4% to around $1.3259.

Meanwhile, the Japanese yen continued its historic decline, with the U.S. dollar trading around 161.93 yen after briefly reaching 161.98, levels not seen since 1986. Japanese authorities have already spent a record 11.73 trillion yen, or more than $70 billion, on currency intervention this year in an effort to slow the yen’s depreciation.

Despite the Bank of Japan ending years of ultra-loose monetary policy and raising interest rates amid higher energy costs linked to the Iran conflict, the currency remains under pressure. Supporting Japan’s economy, government data showed retail sales rose 5.3% in May, comfortably exceeding expectations of 3.1% growth.

Geopolitical developments also remained in focus after the United States and Iran exchanged fresh strikes over the weekend. However, tensions eased after President Trump announced that Iranian officials had requested a meeting in Doha scheduled for Tuesday. White House Press Secretary Karoline Leavitt confirmed that U.S. Special Envoy Steve Witkoff and Jared Kushner would travel to Qatar for the talks, adding that the United States continues to honor the ceasefire agreement.