The U.S. dollar remained close to 10-day lows on Tuesday following news of a preliminary deal to end the Middle East conflict, lifting risk appetite across global markets while investors turned their attention to a series of central bank meetings in Japan and Australia.
U.S. President Donald Trump announced that the U.S. and Iran have signed a preliminary agreement to end the war, though specific details have not yet been released. Despite the lack of specifics, financial markets responded positively, with oil prices falling on the news.
The agreement would extend a fragile ceasefire — first announced in April — by an additional 60 days and reopen the Strait of Hormuz, a critical shipping passage that Tehran has effectively blocked since the U.S. and Israel launched attacks on Iran in February.
The dollar index, which tracks the U.S. currency against six others, stood at 99.66. The index has climbed roughly 2% since the conflict began in late February, driven by volatile reactions to the ceasefire and ongoing retaliatory strikes between the parties involved.
Currency markets were more restrained in their reaction compared to other financial sectors, as traders awaited decisions from several major central banks this week, including the Bank of England and the U.S. Federal Reserve later in the week.
The euro was trading at $1.159, just under the 10-day peak of $1.1622 reached the previous day. The British pound was valued at $1.3413 in early Tuesday trading.
Tony Sycamore, a market analyst at IG, noted that while energy markets moved swiftly to reduce concerns about prolonged supply disruptions, the road back to normal shipping flows is far from simple. “While energy markets moved quickly to price out the immediate risk of prolonged supply disruptions, the path back to normal flows remains far from straightforward,” he said.
Analysts at ING cautioned that market reactions have outpaced actual developments on the ground. “A more durable repricing requires safe, predictable and insured shipping through the Strait of Hormuz,” they wrote. “And demand could likely to be higher than usual as depleted reserves need to be replenished. Re-escalation risks are reduced, but not off the table.”
Uncertainty over supply chains, inflation, and interest rate paths is expected to keep investors cautious in the near term.
The Australian dollar was trading at $0.7069 ahead of the Reserve Bank of Australia’s policy meeting, where the central bank is widely expected to leave rates unchanged following three straight increases, even as inflation stays elevated.
Charu Chanana, chief investment strategist at Saxo, said investors will be watching whether the RBA’s statement continues to signal a leaning toward further tightening or begins to acknowledge that inflationary pressures may be easing. “The RBA may not want to sound too dovish yet. Inflation is still not fully back in the comfort zone and markets are still pricing a meaningful chance of one final hike by year-end,” she said.
In Japan, the yen was trading at 160.24 per U.S. dollar, hovering near the closely watched 160 level that has made traders nervous about possible intervention from Tokyo. Even the peace deal news offered little relief for the struggling Japanese currency.
The Bank of Japan is set to raise interest rates to a 31-year high on Tuesday, a move that is broadly anticipated. Investor focus will instead be on signals about when the next rate increase might come and the overall pace of tightening.
Deputy Governor Shinichi Uchida’s press briefing following the meeting is expected to draw significant attention, with markets anticipating he will reaffirm the central bank’s commitment to continued rate hikes without offering a specific timeline for the next move.
Yuxuan Tang, head of rates and foreign exchange strategy for Asia at J.P. Morgan Private Bank, warned that any communication perceived as dovish could reignite bearish bets on the yen and Japanese government bonds, making efforts to stabilize markets more costly. “That said, the BOJ has not typically leaned hawkish in its communication, particularly given the recent stabilization in inflation and downside growth risks from elevated energy prices,” Tang added.
