The U.S. dollar is poised for its second straight week of decline as currency traders respond to diplomatic developments in the Middle East, including a ceasefire agreement and potential peace negotiations.
A 10-day truce between Lebanon and Israel became effective Thursday, while President Donald Trump indicated that upcoming discussions with Iran may occur over the weekend.
Negotiators from the United States and Iran have reportedly lowered expectations for a broad peace agreement, instead pursuing a temporary understanding aimed at preventing renewed hostilities. Nuclear issues continue to present significant challenges in the diplomatic process.
Currency trading in Asian markets remained relatively stable as investors waited for additional information. The euro held steady against the dollar at $1.1783, marking its third consecutive week of gains, while the British pound traded at $1.3526.
Both European currencies have essentially recovered from losses caused by the Iran conflict, reaching levels not seen in seven weeks.
The dollar index, which tracks the greenback’s performance against six major currencies, remained unchanged at 98.212. The measure is experiencing its second week of losses, erasing most war-related gains as ceasefire optimism diminishes appetite for safe-haven investments.
“The markets are in a bit of a consolidation phase because they have already priced in some optimism about the ceasefire being extended earlier in the week,” said Sim Moh Siong, FX strategist at OCBC.
“You will need the next catalyst to provide a more directional move. It’s no longer a one-way street for the dollar from here.”
The Australian dollar remained near four-year peaks at $0.7163, supported by positive risk sentiment. New Zealand’s currency declined 0.06% to $0.5888.
The dollar gained slightly against the Japanese yen, reaching 159.26. Bank of Japan Governor Kazuo Ueda stated Thursday that decisions regarding interest rate increases must consider the country’s currently low real interest rates.
Financial markets are closely monitoring how central banks will address inflation pressures stemming from the conflict, with monetary authorities maintaining cautious approaches.
U.S. Treasury yields remained stable Friday following gains in the previous session, as elevated oil prices sustained inflation concerns. The two-year yield stood at 3.7758%, while the 10-year benchmark yield held at 4.3132%.
Federal funds futures indicate market expectations that the Federal Reserve will maintain current interest rates throughout the year.
Group of Seven finance ministers and central bank leaders have committed to taking action if needed to address economic and inflation risks from Middle East conflict-related energy price volatility and supply disruptions, according to French Finance Minister Roland Lescure’s Thursday statement.
European Central Bank officials echoed this cautious approach, downplaying expectations for rate increases this month and emphasizing the need for additional economic data before making policy changes.
Weekly unemployment benefit applications in the United States dropped more than anticipated, indicating continued labor market stability. This development supports the Fed’s position to maintain unchanged rates while assessing war-related inflation impacts.
“Hiking into a negative supply shock cannot compensate for energy-driven inflation in the near term and risks exacerbating growth headwinds,” ANZ noted in a research report.
