Dollar Holds Gains Amid US-Iran Impasse

The dollar index remained above 99 on Tuesday after advancing in the previous session, as stalled peace negotiations between the US and Iran bolstered safe-haven demand while keeping inflation risks and interest rate expectations in focus. On Monday, Iranian media reported that Tehran had suspended communications with Washington in response to Israeli attacks in Lebanon. Meanwhile, President Donald Trump said discussions are still ongoing and suggested that a memorandum of understanding with Iran to reopen the Strait of Hormuz could be reached within the next week. Nevertheless, rising energy-driven inflation has led markets to price in the possibility of a Federal Reserve rate hike before year-end. Investors are now awaiting Tuesday’s JOLTS job openings report, followed by the closely watched US monthly employment data on Friday, for further insight into the Fed’s policy outlook.

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.