Dollar Weakens After Reports of US-Iran Sanctions Agreement
The US dollar weakened against most major currencies on Monday (May 18) after oil prices fell and the 10-year US Treasury yield retreated from a 15-month peak, following Iranian media reports that Washington was ready to grant temporary exemptions to Iranian oil sanctions. The euro rose 0.1% to US$1.1636 and the pound strengthened 0.7% to US$1.3409, while the dollar index fell 0.15% to 99.13 after posting its strongest weekly performance in three months last week.
Market sentiment was also influenced by a separate Al Arabiya report that Iran had agreed to a long-term freeze on its nuclear program instead of a complete dismantling of its facilities. The combination of these reports pressured oil and pushed other markets higher, with market participants considering the news the main trigger for the dollar's weakness earlier in the session.
Despite the correction, the dollar had previously been supported by Middle East energy disruptions, as the US economy is considered better prepared to absorb higher energy costs than some other countries. However, the global bond selloff—which briefly resumed earlier before reversing—underscored concerns that expensive energy could push central banks to maintain tighter policy. Commerzbank believes the shift in Fed expectations toward more restrictive measures became more pronounced last week, as markets began to boldly price in interest rate hikes.
The Fed's leadership transition issue is also in focus. Some market participants believe this movement also represents a "test" of the stance of new Fed Chairman Kevin Warsh, particularly whether he will respond independently to inflationary pressures. The market is now pricing in a more than 52% chance of a Fed rate hike in January, while persistent inflation—partly fueled by the war—could dampen hopes of a rate cut.
In Asia, the yen weakened 0.2% to 159 per dollar, hitting its weakest level since April 30th. After Japan's intervention in late April and early May briefly strengthened the yen, the currency has since given up most of its gains. Media also reported that the Japanese government may issue debt to fund additional spending to cushion the economic impact of the Middle East war.
The market will now await official confirmation on the sanctions waiver option and details of the nuclear diplomacy pathway, while monitoring the direction of oil prices, US yields, and signals from Warsh and Fed officials regarding inflation tolerance. In Japan, yen dynamics and fiscal financing plans also have the potential to pose further sources of volatility.
Source: Newsmaker.id
