Dollar Holds Decline on US-Iran Deal

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.

The dollar index hovered around 99 on Friday after weakening in the previous session, as reports that the US and Iran had reached a tentative peace agreement eased concerns over inflation and future interest rate hikes. Washington and Tehran are reportedly set to extend their ceasefire by 60 days and begin negotiations on Iran’s nuclear program, while also considering unrestricted shipments through the Strait of Hormuz. However, the report noted that President Donald Trump has not yet approved the proposed terms. Meanwhile, the latest US PCE price index data showed softer-than-expected inflation readings, helping calm fears that the recent energy shock would significantly worsen the inflation outlook. Even so, markets continue to expect the Federal Reserve to keep interest rates unchanged well into next year.

The dollar index fell to 99 on Thursday, retreating from session highs near 99.5, after Axios reported that the US and Iran had reached an agreement to extend the ceasefire, pending approval from President Donald Trump. The dollar was already under pressure following the release of the latest PCE report, which showed softer-than-expected inflation readings. Headline and core PCE rose 0.4% and 0.2% month-over-month, respectively, although annual inflation remained well above the Fed’s target at 3.8% and 3.3%. The data helped ease concerns that the recent energy shock would significantly worsen the inflation outlook. Still, market volatility and uncertainty are expected to persist, as conflicting signals have emerged in recent days and traders continue to await clear confirmation of a lasting end to the conflict, along with the full reopening of the Strait of Hormuz.