Dollar Index Drops, Markets Digest Hopes for US-Iran Peace
The US dollar index (DXY) weakened to around 99.05 in early Asian trading on Monday (May 25), as risk appetite improved following hopes for a US-Iran peace deal that could reopen the Strait of Hormuz.
President Donald Trump said Washington and Tehran had "largely negotiated" a memorandum of understanding for a peace agreement that would reopen the vital waterway, according to Reuters. However, the market was not yet fully aggressive due to the uncertainty surrounding when Hormuz would actually reopen.
Analysts said enthusiasm was tempered by the lack of clarity, with Iran still controlling shipping in the Strait of Hormuz, while the US refused to lift its naval blockade on Iranian-linked vessels. This uncertainty has led market participants to await confirmation before pushing for stronger asset movements.
On the monetary policy front, energy-related inflationary pressures have shifted market expectations from a cut scenario to a potential interest rate hike. The narrative is simple: if Hormuz remains closed and energy costs remain high, inflation risks rise, leading the market to believe the Fed may need to tighten further, which could ultimately support the dollar.
The market currently rates a 45.1% probability of a 25 bps interest rate hike by year-end (CME FedWatch). The next focus will be on Thursday's US PCE Price Index release; a warmer-than-expected result could potentially boost the dollar in the short term, while the direction of negotiations and signals regarding the opening of Hormuz remain key drivers of risk sentiment. (asd)
Source: Newsmaker.id
