MUFG’s Senior Currency Analyst Lee Hardman notes the US Dollar (USD) has retreated, with the US Dollar Index (DXY) back towards 98.000, as markets anticipate further de-escalation in the Middle East conflict. He highlights that optimism over a potential deal and normalization of traffic through the Strait of Hormuz is capping Dollar upside, even though a confirmed peace agreement may not trigger another sharp USD sell-off.

De-escalation hopes cap Dollar upside

“The US dollar has quickly given up gains recorded at the start of this week with the dollar index falling back towards the 98.000-level.”

“Despite the setbacks over the weekend including Iran firing on vessels in the Strait of Hormuz and the US taking over an Iranian ship, market participants remain optimistic that the Middle East conflict will continue to deescalate providing a headwind for US dollar performance.”

“Despite the divide, Bloomberg has reported that there’s still a good chance of a deal in the next few days that effectively ends the war, even if more negotiations are needed over nuclear and military issues according to officials.”

“With the US dollar already trading back close to levels prior to the Middle East conflict from late February, the announcement of a deal may not trigger another sharp sell-off for the US dollar.”

“Market participants will also be watching closely to see how quickly traffic then normalizes through the Strait to ease global energy supply restrictions.”

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