The US dollar held steady on Monday as markets awaited the results of peace talks in the Middle East and signals on the timing of central bank rate hikes. According to Reuters, the dollar index edged lower last week on hopes for a deal between the United States and Iran to open the Strait of Hormuz shipping lane for oil, with the index flat at 99.00 after last week's drop of 0.4%. The deal, still pending Trump's approval, would extend the truce for another 60 days and allow traffic to flow through the strategic waterway while negotiators tackle difficult issues such as Iran's nuclear program. Oil jumped in early trade after Israel ordered troops to move further into Lebanon in the battle with Iranian-backed Hezbollah, adding to geopolitical tensions. A senior Iranian source told Reuters an agreement was close but had not yet been approved, maintaining uncertainty around the potential deal.
US nonfarm payrolls data due on June 5 are expected to show an unemployment rate of 4.3% and an increase of 85,000 jobs, according to a Reuters poll as of Friday. Financial markets are betting the Fed's next move will be to raise its key rate from the current range of 3.50% to 3.75%, probably by year's end, with officials having been eyeing a rate cut before the start of the Iran war. As per Reuters, 'USD will be heavily influenced by developments in the US-Iran war and the U.S. non-farm payrolls report for May,' said Joseph Capurso, head of FX at Commonwealth Bank of Australia. 'Once the Strait is reopened, over time the oil price will fade and interest rates will return as a greater influence on the USD,' he added. The European Central Bank should raise rates this month even if a U.S.-Iran peace deal is reached, according to ECB board member Isabel Schnabel, who is set to speak in South Korea on Monday.
The euro fell 0.08% to $1.165 while the yen weakened 0.08% to 159.41 per dollar, according to Reuters. Sterling slipped 0.07% to $1.3449. A speech by Bank of Japan Governor Kazuo Ueda on Wednesday is highly anticipated for signals to whether the central bank will proceed with a rate increase the following week. While there is no consensus yet within the BOJ on the decision, a pause in the central bank's taper of government bond purchases is increasingly seen as a preferred option, said two sources familiar with the deliberations. Japan's finance ministry confirmed on Friday that the government spent 11.7 trillion yen ($73.40 billion) intervening in currency markets over the previous month to support the yen, confirming what traders had widely suspected. The Australian dollar traded flat at $0.7181 against the greenback, while New Zealand's kiwi fell 0.17% to $0.5978.
Treasury Secretary Scott Bessent suggested the Trump administration could remove some sanctions on Iran depending on how matters proceed in the current standoff with Tehran. Asked whether the US would keep its financial and economic embargo on Iran going, Bessent said 'we'll see.' Speaking Friday at the Reagan National Economic Forum in Simi Valley, California, Bessent emphasized that 'anything that's taken off will be taken off slowly,' with 'milestones that the Iranian regime would have to meet' as part of any deal that includes sanctions relief. He also warned that the administration could 'ramp up sanctions if a deal isn't imminent.' Iran has been under heavy economic sanctions since President Donald Trump backed out of a deal limiting its nuclear program in his first term, with Tehran consistently demanding sanctions relief as one of its conditions for an agreement with the US.
According to Axios, the preliminary agreement includes very specific terms for the 60-day memorandum of understanding. The Strait of Hormuz is to be fully opened—with no tolls and no harassment of ships—and Iran commits to clearing mines from the strait within 30 days of signing. At the same time, the U.S. naval blockade would be lifted in proportion to the restoration of commercial shipping. Iran would formally commit to not pursuing nuclear weapons, and during the 60-day negotiation window, discussions would take place on how to dispose of highly enriched uranium and how to limit further enrichment. For its part, the U.S. promises talks on lifting sanctions, unfreezing Iranian funds, and establishing a mechanism for delivering goods and humanitarian aid to Iran. Earlier Friday, Trump said he's making a 'final determination' on the preliminary deal to extend the ceasefire with Iran.
The market reaction reflected in today's quotes is a textbook example of an 'anticipation trade.' Crude oil (OIL -0.25%, OIL.WTI -0.48%) is falling because the potential reopening of the Strait of Hormuz signals the return of Iranian oil to the market and an increase in global supply. The dollar is losing ground (USDIDX -0.16%, USDPLN -0.29%) because the easing of geopolitical tensions is driving capital away from safe-haven assets, which automatically boosts EURUSD (+0.21%) and GBPUSD (+0.10%). Gold is gaining slightly (+0.11%) on the back of the dollar's weakness. According to xStation Daily Summary, markets are betting on the mere possibility of a breakthrough, with the US100 having erased all of its losses from the day and currently trading higher on an intraday basis. However, Trump and his advisors have believed on several occasions that they were close to a deal—none of which have materialized so far, and until Trump officially signs the deal, the entire scenario remains in the realm of unconfirmed reports.
