The U.S. dollar traded in a narrow range on Tuesday as investors remained cautious about Middle East peace talks and their potential impact on global markets. According to Reuters, the dollar index was up 0.046% at 99.216, having traded in a narrow range of about 98.9 to 99.5 since May 15. The currency has given back some of its gains from the initial surge at the start of the Iran conflict on February 28, which had been buoyed by safe-haven demand and the U.S. economy's relatively limited exposure to energy-driven inflation. U.S. President Donald Trump said on Monday that talks with Iran were ongoing, providing some support to the dollar while investors await concrete progress on reopening the Strait of Hormuz. President Trump is still optimistic the US can reach an interim peace deal with Iran soon after the Islamic Republic threatened to suspend talks because of Israel's escalating attacks in Lebanon, as reported by Bloomberg. "I think you're talking about over the next week," Trump said to ABC News late on Monday, referring to a memorandum of understanding with Iran to reopen the Strait of Hormuz.
Most emerging market currencies advanced as hopes of a deal in the Middle East boosted risk sentiment and US data showed a strong labor market, according to Bloomberg. South Africa's rand and Mexico's peso — often seen as barometers of risk appetite —were among the best performers. Brazil's real also advanced as markets largely shrugged off news that the US is proposing a new 25% tariff on the Latin American country's goods. "Sentiment is positive, probably because economic indicators in the US are not bad and the Iran conflict might be solved," said Marco Oviedo, senior strategist at XP Investimentos. "Investors have been very cautious lately and focused on the war, and that's the main driver now," he added. In equities, stocks advanced for the third day on the back of a rally fueled by Asian technology stocks, hitting a fresh record. The MSCI index has advanced more than 27% so far this year.
Euro zone inflation data reinforced expectations for a quarter-point European Central Bank rate hike later this month, which markets had already widely priced in. As per Reuters, traders are now betting on two hikes by December and are putting about a 50% chance on a third increase. The euro fell 0.03% to $1.1629, while U.S. data on Tuesday showed job openings rose to 7.618 million in April, ahead of Friday's closely watched monthly employment report. Carsten Brzeski, head of macro at ING, noted that "the pass-through of higher energy and input prices to final consumption will be limited due to a lack of ability and willingness of consumers to actually pay for these higher prices."
Japan's Finance Minister Satsuki Katayama said on Tuesday authorities are ready to respond in currency markets as needed, while refraining from comment on recent moves. According to Reuters, the yen was last weaker at 159.920 per dollar, near the 160 level widely seen as a trigger for intervention. Derek Halpenny, head of research, global markets at MUFG, said "Action remains likely, and even though inflation has eased, the risk of being behind the curve is rising." Markets are awaiting a speech by Bank of Japan Governor Kazuo Ueda on Wednesday for clues on whether the central bank will raise rates next week. The combination of loose U.S. financial conditions, reversing safe-haven support and the Fed sounding patient has kept the dollar in check, according to Paul Mackel, global head of forex research at HSBC.
The persistently high crude prices as the Strait of Hormuz has remained closed have altered market expectations for Federal Reserve policy. Markets are now pricing in a 53.4% chance for a hike of at least 25 basis points at the central bank's December meeting, up from about 45% in the prior session according to CME FedWatch, after pricing in roughly two cuts at the start of the year. Markets expect the Federal Reserve's next move will be a rate increase, with the U.S. economy remaining stable despite the surge in energy prices, though growth has slowed and job openings have increased. The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.55% after closing at 2.53% on Friday, its lowest close since March 4. The release on Friday of the monthly U.S. employment report could help sway the Fed's policy path in the near term, with the data expected to show a gain of 85,000 jobs in May and no change in the current 4.3% unemployment rate according to a Reuters poll of economists.
Bitcoin was last down 5.8% at $67,213.42, its lowest level since April, according to Reuters. This represents a significant decline from previous levels, with the cryptocurrency continuing to face pressure from broader market uncertainty. The weakness in bitcoin reflects the broader market caution surrounding geopolitical developments and their potential impact on global financial markets.
