The U.S. dollar held near six-week highs on Friday as conflicting signals over a potential U.S.-Iran peace deal created volatility across financial markets. According to reports from Reuters and The Economic Times, the dollar index rose 0.09% to 99.28, with the euro down 0.12% at $1.1604 as traders weighed the prospects of a near-term deal to end the Middle East war. The strength comes as the United States has seen some progress towards a deal with Iran but more work is required, as U.S. Secretary of State Marco Rubio said there had been "some good signs" in talks on Friday, while Washington and Tehran stuck to opposing stances over the latter's uranium stockpile and control of the Strait of Hormuz. A senior Iranian source indicated that no deal has been reached with the US, but the gaps in positions between the two sides have narrowed, though Iran's uranium enrichment and Tehran's control over the critical Strait of Hormuz remain among the sticking points. US President Donald Trump also said that the US does not want tolls on the Strait of Hormuz and added that the US military will retrieve Iran's stockpile of highly enriched uranium, keeping geopolitical risk premium in play and favoring USD bulls.
Fed funds futures traders are pricing in 54% odds of a rate hike by December, as reported by The Economic Times. Fed Governor Christopher Waller, an influential voice in policymaking who until recently had advocated for lower interest rates, said on Friday the U.S. central bank should axe the 'easing bias' from its policy statement and effectively open the door to a possible rate hike. The University of Michigan's Surveys of Consumers showed that U.S. consumer sentiment plunged to a record low in May as surging gasoline prices fueled anxiety over worsening affordability, while inflation expectations also rose. However, inflation pressures feeding into the Fed's preferred gauge — Personal Consumption Expenditures — have remained relatively contained, supporting the case for keeping rates steady. The CME Group's FedWatch Tool indicates over a 60% chance that the US central bank will raise borrowing costs by 25 basis points at the December meeting. Noel Dixon, global macro strategist at State Street Global Advisors, noted that "the key question now is if the Fed is going to hold," while cautioning that "the risk to my view is that Trump resumes attacks on Iran in an aggressive fashion. That could be a catalyst for greater interest rate volatility, and that could cause the Fed to panic and seriously consider a hike."
Traders are increasingly concerned that ongoing energy disruptions will filter through to core consumer prices, potentially forcing a tighter monetary policy response, according to The Economic Times. Countries more exposed to rising energy costs face mounting growth concerns, lending further support to the U.S. dollar over its peers. Australia is grappling with shortages of jet fuel and diesel that are likely to weigh on several key industries, Dixon noted. The Australian dollar weakened 0.27% versus the greenback to $0.7128 as the country struggles with energy shortages. The pound gained 0.08% to $1.344, having shrugged off data earlier that showed retail sales dropped by the most in nearly a year in April as consumers felt the pinch of the inflationary effects of the Iran war.
The yen remains fragile even after what was likely intervention by Tokyo just weeks ago to prop it up - it has since surrendered nearly 75% of those gains, keeping traders on alert for further action by Japanese authorities. According to currency strategist Lee Hardman at MUFG, "It's just buying time, really. What they need is a change in fundamentals, and I think the best thing that could happen is a quick deal to end the Iran conflict." The Bank of Japan is expected to raise borrowing costs only gradually, while other central banks — including the European Central Bank — are likely to move far more quickly, putting the yen at a disadvantage with yield-seeking investors. On a trade-weighted basis, the yen is at record lows, which favours its exporters but compounds the energy-price shock, given Japan's reliance on imported goods. Data on Friday showed Japan's core inflation slowed to a four-year low in April, complicating the outlook for BOJ policy.
