Dollar Weakens Amid Optimism for Iran-US De-escalation
The US dollar weakened for a second day on Thursday (May 7), as hopes for a de-escalation in the Iran-US war encouraged global markets to take more risks and reduced safe-haven flows to the greenback. Sources and officials said the two sides were moving toward a limited and temporary agreement to end the war, although the most sensitive issues remain unresolved.
These developments have supported stock and bond markets since Wednesday, while also pressuring the dollar against most major currencies.
The euro rose 0.2% to US$1.1755 after strengthening 0.47% the previous day, while sterling rose 0.2% to US$1.36255 after rallying 0.4% on Wednesday. Corpay believes the "cautious" optimism is lifting the currencies of energy-importing countries and curbing dollar demand, with implied FX volatility also declining and fear levels below pre-war levels in many pairs.
The transmission channel is primarily through energy and inflation expectations: signs of an easing conflict have raised hopes that Gulf exports could recover, depressing oil prices and reducing the risk premium that had previously supported the dollar. However, the market also believes this calm could quickly change as there is no indication that negotiating positions have fully converged, so negative headlines still have the potential to trigger renewed volatility.
In Asia, the yen moved relatively flat at around 156.36 per dollar after strengthening sharply on Wednesday amid speculation of Japanese intervention. Central bank data indicated Japan may spend up to 5.01 trillion yen (approximately US$32.06 billion) to support its currency, while currency diplomat Atsushi Mimura stated that Japan is not restricted in its intervention. However, State Street Investment Management believes that without follow-up action by the Bank of Japan through consecutive interest rate hikes, the yen risks further weakening in the near term, although repeated intervention could increase the likelihood of broader policy action in the June-July period.
More broadly, the dollar also weakened against a number of other currencies, including the Norwegian krone and the Australian dollar. The Australian dollar rose 0.2% to US$0.72516, near a four-year high touched on Wednesday, while the Swedish crown strengthened about 0.4% to 9.198 per dollar after the Riksbank held interest rates at 1.75% as expected, while assessing that inflation risks from the Middle East war had increased "slightly."
Bitcoin fell about 1% to US$80,819, but remained near a more than three-month peak hit in the previous session.
Market focus will next be on developments in Iran-US diplomacy and their impact on energy prices, as well as Japanese policy signals ahead of next week's meeting between US Treasury Secretary Scott Bessent and Japanese Prime Minister Sanae Takaichi, which is expected to discuss curbing speculation about a weaker yen.
Market participants will continue to monitor the following variables: negotiation headlines, the direction of oil as a proxy for inflation risk, FX volatility, and central bank policy space to respond to shifting risk premiums.
Source: Newsmaker.id
