The collapse of high-level negotiations between the United States and Iran over the weekend, despite nearly 21 hours of talks mediated by Pakistan, has reignited tensions in the Middle East and led to a sharp rise in oil prices [2]. US Vice President JD Vance stated that the US had put its 'best and final offer' on the table, which was rejected by Iran. In response, US President Donald Trump indicated that the US Navy could begin blockading the Strait of Hormuz, threatening a fragile two-week ceasefire and further escalating geopolitical risks [2]. HSBC notes that Middle East geopolitics and oil remain the dominant drivers for the US Dollar and major FX, with a recently strengthened USD–Oil correlation reflecting both an energy supply shock and increased 'safe haven' demand for the Dollar [1].
The immediate market reaction saw the NZD/USD pair weaken, trading around 0.5830 and down 0.15% on the day, as global risk appetite diminished and safe-haven flows supported the US Dollar [2]. The US Dollar was the strongest against the Japanese Yen, with a 0.27% gain, and also posted gains against other major currencies such as EUR (+0.21%), AUD (+0.26%), and NZD (+0.17%) [2]. HSBC suggests that lower oil prices would support net importers and improve risk appetite, but a prolonged disruption to oil/gas flows via the Strait of Hormuz would weaken sentiment, lift safe-haven demand, and hurt net energy importers [1].
Strategists at TD Securities expect the Federal Reserve to keep rates on hold until September, as it assesses the impact of higher energy prices and geopolitical risks that could fuel stagflationary pressures [2][3]. They forecast 50bps of easing in September and December, with an additional 25bps cut in March 2027, ending with a Fed funds rate at 3.00% [3]. HSBC adds that the Fed is neither in a rate-hiking cycle nor outright hawkish, which may limit broad-based USD strength despite current safe-haven flows [1].
On the New Zealand side, Reserve Bank of New Zealand Governor Anna Breman stated that the domestic economy could see stronger growth if the Middle East conflict is resolved quickly, but emphasized that the duration and scale of supply disruptions remain highly uncertain [2]. Meanwhile, the Wall Street Journal reports that several regional countries are working to bring Washington and Tehran back to the negotiating table, which is helping to cap the US Dollar’s upside and allowing NZD/USD to recover slightly from intraday lows, though the overall backdrop remains bearish for NZD/USD [2].
CONCLUSION
The breakdown in US-Iran talks has heightened geopolitical risks, driven oil prices higher, and strengthened the US Dollar as markets seek safe-haven assets. The Federal Reserve is expected to remain patient, keeping rates on hold until September while monitoring stagflationary risks. While diplomatic efforts may temper the Dollar's gains, the prevailing uncertainty continues to weigh on risk-sensitive currencies and global market sentiment.