DXY Rebounds after Jobs Report

The dollar index rose to 99.2 on Monday, extending May’s 0.9% gain, as renewed setbacks in US-Iran negotiations added to geopolitical uncertainty and pushed oil prices higher. Iranian media reported that Tehran had suspended communications with Washington following attacks in Lebanon and was moving to fully close the Strait of Hormuz. Earlier exchanges of military strikes between the US and Iran had already raised doubts about the prospects for a diplomatic agreement. A prolonged closure of the Strait of Hormuz would add to inflationary pressures by driving energy prices higher, reinforcing expectations that the Fed will keep interest rates elevated for longer. The odds for a rate hike by the Fed in December currently stand above 60%. Meanwhile, the ISM Manufacturing PMI rose to 54 in May, indicating the strongest expansion in factory activity in four years. Price pressures also remained elevated, adding further upward momentum to the US dollar.

The dollar index edged above 99 on Monday, snapping a two-session decline as prospects for a longer-term ceasefire agreement between the US and Iran remained uncertain. Over the weekend, Washington and Tehran exchanged proposals seeking revisions to a draft accord that would extend the ceasefire and reopen the Strait of Hormuz, though there was little indication that negotiations were nearing a breakthrough. President Donald Trump also reaffirmed his demand that Iran suspend its nuclear program and fully restore the strait’s status as an open international waterway. Investors also turned their attention to the closely watched US nonfarm payrolls report, which is expected to provide fresh clues on labor market conditions and the outlook for Federal Reserve policy. Markets are increasingly pricing in the possibility of a Fed rate hike before year-end after inflation accelerated, marking a sharp shift from earlier expectations that interest rates would be lowered.

The dollar index was little changed at 99 on Friday, close to two-week lows, but was on track to end the May month about 1% higher, as investors continued to monitor developments in the Middle East. Signs have emerged that the US and Iran may be closer than ever to reaching an agreement, with recent reports indicating that both countries have reached a preliminary understanding to extend a ceasefire by 60 days and begin discussions over the future of Tehran’s nuclear program, although President Trump has yet to formally endorse the terms. Oil prices have declined, helping to ease inflationary pressures. Data released on Thursday showed that both headline and core PCE monthly inflation came in below expectations although annual readings remained well above the Fed’s target at 3.8% and 3.3%. Investors currently expect the Fed to keep the federal funds rate unchanged through year-end, though markets still assign roughly a 46% probability to a rate hike in December.