Dollar Holds Losses on Hormuz Deal

The dollar index hovered around 99.6 on Thursday, remaining close to a seven-week low as the agreement to partially reopen the Strait of Hormuz weighed on oil prices, easing inflation pressures and diminishing expectations for more aggressive Federal Reserve tightening. Iran and Oman agreed to establish a shipping corridor through the strait, strengthening hopes for improved energy supplies from the Middle East. Investors have since reduced their expectations for Fed rate hikes this year, now anticipating only one increase by year-end, compared with two as recently as last week. Meanwhile, ADP data showed the US economy created just 44,000 private-sector jobs in July, marking the weakest monthly gain since January and falling well short of forecasts for 70,000. Separately, Fed Governor Lisa Cook said that she is willing to raise rates if inflation fails to moderate, cautioning that the central bank may have limited scope to delay action before returning inflation to its 2% target.

The dollar index fell to below 99.8 on Wednesday, the lowest in seven weeks, holding the sharp decline triggered by intervention on the yen and foreign selling of long-term, dollar denominated fixed-income assets last week. The recent plunge for the yen and JGBs drove the US Treasury and the Japanese counterpart to buy an estimated $88 billion in JPY, with a portion of dollar selling featured in the intervention. The developments were in tandem with pressure from the Fed's latest rate hold. During the presser, Fed Chairman Warsh signaled some reluctance to confirm that a rate hike would be his preferred reaction to higher inflation, leading foreign markets to trim holdings of dollar-denominated assets. In turn, expectations of a Fed hike next month were dimmed by a fresh pullback in key energy prices and a soft ADP employment report.

The dollar index remained below the 100 mark on Wednesday, coming under renewed pressure as reports of an imminent interim agreement between the US and Iran to reopen the Strait of Hormuz drove oil prices sharply lower, easing concerns over inflation and the need for additional interest rate hikes. On Tuesday, Qatar said an interim proposal had been prepared, while both Washington and Tehran signaled progress in negotiations to restore access through Hormuz. US Treasury Secretary Scott Bessent also said a deal could be reached as early as Tuesday or Wednesday. Markets reduced expectations for a September Federal Reserve rate hike to around 57%, down from 67% a day earlier. Investors are now awaiting a series of US labor market reports for further clues on the Fed’s policy outlook, with ADP’s July private payrolls data due later today. Meanwhile, the dollar continued to nurse losses against the yen after the US and Japan signaled they remain prepared to intervene again if necessary.