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- US Dollar Index falls as easing risk aversion followed news that Israel and Lebanon agreed to renew their ceasefire on Wednesday.
- Geopolitical optimism was held in check after President Trump threatened to cancel the ceasefire if Tehran kills US troops.
- The Greenback may rally as strong May jobs data fuels expectations that the Federal Reserve will raise interest rates.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is remaining subdued after three successive days of gains and trading around 99.50 during the Asian hours on Thursday.
The Greenback lost ground on easing risk aversion following the news that Israel and Lebanon on Wednesday agreed to renew a ceasefire. However, it would require a “complete cessation” of fire by Iran-backed Hezbollah. The agreement was announced in a joint statement after US-led talks in Washington.
Israel and Lebanon do not have formal diplomatic relations, though also agreed to establish a number of “pilot security zones” in which the Lebanese armed forces “will take exclusive control of the territory to the exclusion of all non-state actors.”
However, the Wall Street Journal reported on Thursday that the US President Trump has told aides that he would consider ending the ceasefire with Iran if Tehran kills US troops. Trump insisted that the week-long pause in airstrikes remains intact despite a steady stream of violent skirmishes. Moreover, Trump said in a New York Post interview that the blockade lasting until Labor Day is unlikely but possible, effectively extending the market’s timeline for a Hormuz reopening.
The US Dollar may regain its ground amid rising expectations that the US Federal Reserve (Fed) will raise interest rates this year. Stronger-than-expected US jobs data, including the May ADP private payrolls and JOLTS job openings, suggested a resilient US labor market. These reports might prompt traders to raise their bets that the Fed will keep interest rates higher for longer.
Expectations have shifted significantly as the ongoing war in Iran continues to impact energy markets, pushing prices higher and driving inflation upward. Markets are now pricing in nearly a 42% chance of a Fed rate hike in December, according to the CME FedWatch Tool.
