The US dollar fell to its weakest level in 10 days on Monday as optimism over a preliminary peace agreement between Washington and Tehran encouraged investors to move towards riskier assets and triggered a sharp decline in oil prices.
The dollar index, which tracks the greenback against a basket of major currencies, slipped 0.1% to 99.395, its lowest level since June 5. The euro climbed as much as 0.5% to US$1.1622, while sterling rose 0.4% to US$1.3459, with both currencies approaching their strongest levels in 10 days.
Risk-sensitive currencies also strengthened, with the Australian dollar gaining nearly 0.7% to US$0.7087 and the New Zealand dollar rising 0.6% to US$0.5863.
The shift in sentiment came after US and Iranian officials said they had agreed on a framework to end the conflict, lift the US blockade of Iran and reopen the Strait of Hormuz. A memorandum of understanding is expected to be signed in Switzerland on Friday, although investors are awaiting further details and negotiations over Iran’s nuclear programme.
The easing of geopolitical tensions sent Brent crude prices down more than 4%, reducing concerns over inflation and weighing on demand for traditional safe-haven assets.
“I think we’ll see the dollar fall over the course of the next few sessions. We’ll probably see some of the risk currencies like Aussie and yen appreciate a little bit. But I don’t think we’re going to see any huge moves,” said ATFX Global chief market strategist Nick Twidale.
“There’s going to be a lot of wait and see, on how quickly the strait really reopens and how long it’s going to take for oil flows to really get back to normal. It’s certainly going to be months rather than weeks.”
Attention is also turning to major central bank meetings this week, with the US Federal Reserve, Bank of Japan and Reserve Bank of Australia all set to announce interest rate decisions.
According to the CME FedWatch Tool, traders have reduced expectations for a US rate hike this year, with markets now pricing in around a 50% chance of a move in December compared with more than 70% a week ago.
“Negotiations on aspects of the deal are ongoing, but no doubt central bankers will be breathing a sigh of relief, for now at least, that the upside risks to inflation appear to be receding and not becoming the central scenario,” said TD Securities senior rates strategist Prashant Newnaha.
Reuters
