US dollar climbs as Treasury yields pressure yen to 40-year low

Summary

The US dollar strengthened after Treasury yields jumped, pushing the yen to its weakest level since 1986 without triggering Japanese intervention. Wall Street futures edged lower after strong gains, while AI-related stocks continued to underpin sentiment following a technology-led rally that lifted the S&P 500 and Nasdaq to record highs. Asian markets were mixed after an exceptionally strong quarter, with Japan, South Korea and Taiwan outperforming on robust technology demand. US-Iran talks remained stalled, leaving uncertainty over the Strait of Hormuz and broader market sentiment

Equities

The FTSE 100 closed 0.1% higher on Tuesday, extending its winning streak to a sixth consecutive quarter as improving sentiment towards the Middle East supported financial and defence shares. The index has now risen in 11 of the past 12 months, although the FTSE 250 finished flat on the day despite recording its strongest quarterly performance in five quarters. UK data also showed the economy grew 0.6% in the first quarter, while a Lloyds survey indicated business confidence weakened during June as firms continued to face higher costs and global uncertainty.

Defence stocks led the UK market after the government unveiled an additional £15 billion to modernise Britain's armed forces. Rolls-Royce closed 3.3% higher on Tuesday, while BAE Systems, Melrose Industries and Babcock gained between 2% and 3%. Banking shares also advanced, with Lloyds Banking Group rising 2.1% and NatWest adding 1.6%, leaving the banking sector around 20% higher over the quarter.

Sainsbury's finished 1.3% higher on Tuesday after reporting first-quarter results, although management warned the conflict in the Middle East is expected to add to food inflation. Saga climbed 6.7% after stronger-than-expected first-half cruise bookings. Housebuilders came under pressure after reports of a potential multi-billion-pound competition lawsuit, with Persimmon, Barratt Redrow and Taylor Wimpey falling between 1% and 3%, while the sector dropped 1.6%. Car manufacturers also weakened as the UK automotive industry warned electric vehicle makers could face £1.4 billion of tariffs without changes to UK-EU local content rules.

US markets also ended Tuesday on a positive note, with the Dow Jones rising 0.3% to a record closing high for a second straight session, while the S&P 500 gained 0.8% and the Nasdaq climbed 1.5%. Despite recent concerns over technology valuations, the S&P 500 delivered a 14.9% gain for the quarter, its strongest performance since 2020, while the Nasdaq surged 21.4% and the Dow added 13%.

Technology shares drove gains, with the Philadelphia Semiconductor Index jumping 3.9% on Tuesday. Nike fell about 2% in after-hours trading after releasing quarterly results, while investors continued to look ahead to the upcoming second-quarter earnings season, supported by expectations that corporate profits will remain resilient despite geopolitical uncertainty.

Forex & Commodities

The US dollar rose early on Wednesday after Treasury yields climbed overnight, pushing the yen to its weakest level since 1986. The dollar reached 162.8 yen in Asian trading and was last at 162.7 yen, putting traders on alert for possible intervention by Japanese authorities. The euro fell to $1.141, while sterling moved lower to $1.324.

The dollar index held at 101.3 after the 10-year US Treasury yield rose on Tuesday and the two-year yield stood at 4.179%. US job openings rose to a two-year high in May, while softer hiring weighed on consumer views of the labour market. Traders now see a stronger chance of a Federal Reserve rate hike in September, and attention turns to Fed Chair Kevin Warsh’s appearance at the ECB Forum in Portugal on Wednesday.

Spot gold fell 0.8% early on Wednesday to $3,974 an ounce, after touching $3,943 on Tuesday, its lowest level since November. Gold also recorded its biggest quarterly fall since 2013 and declined for a fourth month in June as higher yields and a firmer dollar added pressure.

Oil rose early on Wednesday as uncertainty over Iran-US talks renewed concern about Middle East supply disruption. Brent crude climbed 0.45% to $73.28 a barrel, while WTI rose 0.49% to $69.84. Brent had fallen by about $45 a barrel in the second quarter, its largest quarterly loss since 2008, while US crude posted its biggest quarterly fall since 2020.