The US Dollar Index (DXY) traded near 99.25 during early Asian hours on Friday, gaining momentum as investors weighed resilient US labor data and the prospects of a near-term deal to end the Middle East war, specifically between the US and Iran [1]. The US Department of Labor reported that initial jobless claims fell by 3,000 to 209,000 in the second week of May, signaling continued strength in the labor market, while continuing claims rose slightly to 1,782,000 for the week ending May 9 [2]. This labor market resilience provides the Federal Reserve with room to focus on rising inflation, with markets pricing in a 41.9% chance of a 25 basis point rate hike by year-end, according to the CME FedWatch tool [1]. However, Source 3 reports that traders are pricing in over a 60% chance of a 25 basis point hike in 2026, indicating a discrepancy in timing and probability between sources [3].
Geopolitical developments also played a significant role, as optimism grew around US-Iran peace talks. US Secretary of State Marco Rubio highlighted encouraging signs, with Pakistani mediators expected to visit Tehran and Iranian officials reviewing Washington's latest proposal [2]. Despite this, senior Iranian officials clarified that no deal has been officially reached, though gaps have narrowed. The Islamic Republic’s Supreme Leader, Mojtaba Khamenei, stated that Iran’s uranium enrichment and control over the Strait of Hormuz remain major sticking points [1][2][3]. Investors remain skeptical about a US-Iran peace deal, and ongoing disagreements continue to support the USD's safe-haven status [3].
The US Dollar's strength has impacted other currencies and commodities. The Canadian Dollar (CAD) declined as oil prices eased on rising hopes for a US-Iran agreement, given Canada’s status as the largest crude exporter to the US [2]. The USD/CAD pair appreciated for the fourth consecutive day, trading around 1.3790 [2]. Meanwhile, the New Zealand Dollar (NZD) remained flat against the USD despite upbeat Q1 retail sales data, which rose 0.9% quarter-on-quarter, surpassing estimates of 0.5% [3]. The bullish sentiment surrounding the USD, driven by expectations of Fed tightening, capped gains in NZD/USD, which traded around 0.5870 [3].
In a notable leadership transition, US President Donald Trump announced he will swear in Kevin Warsh as the new chair of the Federal Reserve on Friday, succeeding Jerome Powell, whose term expired but who has continued to serve on a pro-tempore basis until the transition [1][2]. Fed officials remain cautious, holding rates steady for now but moving away from the idea of rate cuts and increasingly open to raising rates if inflation persists [2].
Market participants are closely monitoring upcoming US economic data, including the May Michigan Consumer Sentiment Index, and developments in US-Iran negotiations, as both have the potential to further influence USD strength and global markets [1][2][3].
CONCLUSION
The US Dollar has strengthened on resilient labor data, rising Fed rate hike expectations, and ongoing geopolitical uncertainty surrounding US-Iran negotiations. Commodity-linked currencies like the Canadian Dollar have weakened amid easing oil prices, while the New Zealand Dollar remains capped despite strong retail sales. Market sentiment favors the USD, with investors awaiting further economic data and geopolitical developments for direction.