Dollar Set for Sharp Weekly Drop

The dollar index rose to 99.4 on Thursday, reaching April-highs, as doubts emerged again about near term resolution to the Iranian war pushing oil prices higher again and reigniting inflation concerns. Reuters reported that Iran’s Supreme Leader has issued a directive stating that the country’s near-weapons-grade uranium should not be sent abroad, hardening Tehran’s position on a key US demand in peace talks. Meanwhile, minutes from the latest FOMC meeting showed that a majority of policymakers believe additional rate hikes may be warranted if inflation remains persistently above the Federal Reserve’s 2% target. Markets still broadly expect rates to remain unchanged for the rest of the year, although traders are currently pricing in roughly a 40% chance of a 25 basis-point hike in December.

The dollar index slipped to around 99 on Thursday, pulling back from a six-week high as growing optimism over a potential peace agreement between the US and Iran eased inflation and irate hike concerns while dampening safe-haven demand for the greenback. President Trump said the US was in the final stages of negotiations with Iran, raising expectations that the strategically important Strait of Hormuz could soon reopen. The prospect of renewed shipping flows triggered a sharp decline in oil prices, helping to moderate inflationary pressures and reducing expectations that central banks will need to tighten policy. Still, minutes from the Federal Reserve’s latest meeting indicated that most policymakers believe another rate hike this year could remain appropriate if inflation stays above the Fed’s 2% target. Markets still broadly expect the Fed to leave rates unchanged for the rest of the year, though traders currently assign roughly a 50% probability to a rate increase in December.

The dollar index held lower around 99.1 on Wednesday, pulling back from the early-April highs reached in the previous session, as optimism grew that the US and Iran could soon reach a deal. According to a White House pool report, President Trump said negotiations with Iran are in their final stages, helping drive oil prices lower for a 2nd straight session. Even so, crude prices remain nearly 50% above pre-war levels. Investors remain concerned that elevated energy costs could fuel inflationary pressures and potentially force central banks to tighten monetary policy further. Minutes from the FOMC’s April meeting showed that a majority of policymakers believe additional rate hikes may be warranted if inflation stays persistently above the Fed’s 2% target. Markets still broadly expect the Federal Reserve to leave interest rates unchanged for the rest of the year, though traders currently assign roughly a 50% probability to a rate increase in December.