Dollar Rises Amid Iran Deal Uncertainty

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.

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.