The US dollar fell against all but one its major counterparts on Wednesday on bolstering hopes that the US and Iran may eventually find common ground and agree on a peace deal. The only currency against which the dollar managed to eke out gains was the loonie, which came under pressure due to the collapsing oil prices.
Following US President Trump's decision to freeze "Project Freedom", which was aimed at helping passage through the Strait of Hormuz, reports hit the wires noting that the US was very close to sealing an accord with Iran on a memorandum of understanding to end the war. The document is designed to lay the ground for one month of comprehensive nuclear negotiations.
However, risks of renewed tensions have not disappeared. "If they don't agree, the bombing starts, and it will be, sadly, at a much higher level and intensity than it was before," US President Trump said yesterday.
For now, investors remain hopeful and this is mainly evident by the tumble in oil prices and the retreat in the US dollar, as a potential reopening of the Strait of Hormuz will free more oil into the global market and thereby ease inflation concerns that led to more hawkish communication by major central banks.
Following the latest FOMC decision, investors started assigning a strong likelihood that the Committee may need to lift interest rates at some point next year. However, truce hopes brought that probability lower to around 24%, thereby triggering declines in Treasury yields and the greenback.
Focus now will turn to tomorrow's NFP report. That said, even if the data reveals that the labor market fared well in April following March's strong rebound, the dollar is unlikely to experience strong gains should headlines continue to point to a potential truce in the Middle East.
After all, with inflation-related concerns easing, the case of the Fed raising interest rates could weaken. For dollar traders to enter larger long positions, a re-escalation of the US-Iran conflict may be needed.
The yen was also on the front page of investors' agendas yesterday. The Japanese currency jumped around 1.8% instantly during the Asian session, raising suspicion of another intervention episode.
Although Japanese authorities refrained from confirming whether they stepped into the market, Vice Finance Minister for International Affairs, Atsumi Mimura, noted there are no limitations on how often they can intervene and that they are in daily communication with US authorities about stabilizing the market. US Treasury Secretary Bessent is expected to travel to Tokyo next week to discuss yen moves with Finance Minister Katayama.
However, without the BoJ following through with rate hikes, the yen is unlikely to stage a meaningful recovery. After all, the market is now assigning a strong 62% chance of a rate hike at the June BoJ gathering, and anything arguing against such speculation could exert pressure on the currency again.
On Wall Street, all three indices edged higher, with the S&P 500 and the Nasdaq hitting fresh record highs. Besides the optimism surrounding the geopolitical landscape, it seems that the AI trade is gaining more and more traction, with momentum accelerating amidst the earnings season, as S&P 500 firms are on track for their strongest profit growth in more than four years.
Gold also shone yesterday, driven by the slide in the US dollar and the retreat in Treasury yields. The precious metal emerged above the key resistance of $4,640 and the downward sloping line taken from the high of March 2. This technically and fundamentally significant move could allow extensions towards the $4,840 territory.