Investing.com-- The U.S. dollar held near its highest level in over a year against the euro on Wednesday, while the Japanese yen languished near four-decade lows, keeping traders on high alert for official intervention ahead of a crucial gathering of global central bankers.

The U.S. Dollar Index, which tracks the greenback against a basket of six major currencies, rose 0.18% to 101.27 in Europe trade.

The index extended its recent gains as resilient U.S. labor market data and climbing Treasury yields reinforced expectations that the Federal Reserve may deliver another interest rate hike later this year.

The greenback capped a 1.3% gain in the June quarter, marking its strongest quarterly performance since the third quarter of 2025.

Meanwhile, Tehran has continued to reject direct talks with senior U.S. envoys in Qatar, leaving negotiations over a framework to fully reopen the Strait of Hormuz at an impasse.

Cooling eurozone inflation drags on euro

The euro faced renewed downward pressure after fresh data showed Eurozone inflation cooled faster than anticipated last month, giving the European Central Bank (ECB) room to soften its hawkish stance.

The bloc’s consumer price index (CPI) slowed to 2.8% in June from 3.2% in May, falling below the 3.0% consensus forecast. Core figures also came in cooler than expected.

The data provided a sigh of relief to markets worried that the energy price spikes from the U.S.-Iran conflict would spark a prolonged inflationary spiral. However, the widening interest rate differential between a dovish-tilting ECB and a hawkish Fed pushed the single currency lower.

Sintra showdown: The Warsh-Lagarde dynamic

Monetary policy commentary will take center stage later today at the ECB Forum on Central Banking in Sintra, Portugal, where a panel featuring newly minted Fed Chair Kevin Warsh and ECB President Christine Lagarde is expected to spark markets.

For foreign exchange markets, Warsh’s first international speech since taking the helm of the Fed carries massive implications. Having been appointed by President Trump to lower borrowing costs, Warsh’s recent, unexpected hawkish pivot has caught the market off-guard.

A continuation of this rhetoric today would provide fresh rocket fuel for the dollar, driving it higher against its major peers.

A surging greenback, however, complicates the narrative for the ECB. While June’s cooling inflation data gives Lagarde justification to consider easing restrictive rates, a heavily depreciated euro effectively "imports" inflation back into the Eurozone by making dollar-denominated commodities - like crude oil - more expensive.

Consequently, macro analysts note that if Warsh leans heavily into his hawkish stance, it could destabilize Eurozone inflation expectations, forcing Lagarde to maintain a more cautious, restrictive posture than today’s CPI data would otherwise warrant.

Yen wallows at four-decade lows

The USD/JPY rose to 162.68 after the dollar gained roughly 2.5% against the yen in the second quarter, marking its fourth consecutive quarterly advance. The yen remained under pressure despite data showing an improvement in business sentiment among large manufacturers in the Bank of Japan’s Tankan survey, while the final au Jibun Bank manufacturing PMI remained firmly in expansion territory.

The persistent weakness keeps markets on high alert for currency intervention by Tokyo. Japan’s top currency diplomat noted earlier this week that previous market interventions had been effective, and analysts warn that current levels are ripe for another round of official yen-buying.

Investors now turn their focus to Thursday’s U.S. payrolls report and any fresh developments surrounding negotiations over the Strait of Hormuz, all of which are expected to drive the next move in Asian currencies.

(Roshini Nair contributed reporting)