Dollar Little Changed on Tuesday

The dollar index was flat to lower around 99.1 on Tuesday, helped by a modest retreat in oil prices, although sentiment remained sensitive to developments in the Middle East. US President Trump said Israel and Hezbollah had agreed to halt attacks against each other in Lebanon and that discussions with Iran were ongoing. On Monday, borrowing costs had risen after Iran’s Tasnim news agency reported that Iranian negotiators were pausing talks with the US following Israeli strikes in Lebanon, with Tehran also reportedly considering a full closure of the Strait of Hormuz. Investors are now awaiting key labour market data later this week, including the US jobs report, which is expected to help shape expectations for Federal Reserve policy under the new chair, Kevin Warsh. Traders are currently pricing in around 17 basis points of rate hikes by year-end, implying roughly a 70% probability of a 25bps increase, with a full hike priced in by March 2027.

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.