The US Dollar (USD) maintained its strength against major currencies, supported by rising expectations of a hawkish Federal Reserve policy stance and ongoing geopolitical tensions in the Middle East, particularly related to the Strait of Hormuz and US-Iran negotiations [1][2][4]. The USD/CAD pair remained elevated around 1.3790 for the fourth consecutive day, as traders anticipated the Fed would keep interest rates higher for longer, with policymakers signaling openness to further hikes if inflation persists [1]. The US Dollar was the strongest against the Canadian Dollar this week, with a 0.24% gain, while the Canadian Dollar struggled due to declining oil prices—West Texas Intermediate (WTI) fell for the third straight day to $96.80—amid easing supply concerns and optimism over a potential US-Iran agreement [1][4].
Negotiations between the US and Iran continued, with both sides exchanging messages and draft texts, but no formal deal had been reached as of Friday. Iranian officials acknowledged that gaps had narrowed, but sticking points remained, including uranium enrichment and control over the Strait of Hormuz [2][4]. US Secretary of State Marco Rubio noted 'some encouraging signs' but cautioned against excessive optimism, stating, 'let's see what happens over the next few days' [1][4].
The New Zealand Dollar (NZD) also weakened, with NZD/USD trading near 0.5870, as the safe-haven USD benefited from Middle East uncertainty and expectations of persistent US inflation. Markets priced in a 41.9% probability of a 25 basis point Fed rate hike by year-end, according to the CME FedWatch tool [2]. The Reserve Bank of New Zealand (RBNZ) is expected to hold rates steady next week, but a slim majority of economists in a Reuters poll foresee possible hikes by September if the global energy shock lifts inflation expectations [2].
The Indian Rupee (INR) was projected to remain vulnerable, with MUFG's Michael Wan forecasting USD/INR could reach 98.00 or even 100.00 if the Iran conflict persists. The baseline forecast sees USD/INR trading between 95.00 and 96.00, with INR underperformance attributed to weak capital inflows, a wider current account deficit, higher oil prices, and potential energy supply disruptions. The market has already priced in over 125 basis points of RBI rate hikes over the next 12 months, and 12-month USD/INR FX forwards are just below 100 [3].
On the data front, the US S&P Global Composite PMI for May came in at 51.7, matching April's print, indicating continued healthy business activity [4]. Wall Street's main indexes registered marginal gains, and US stock index futures traded modestly higher in early European trading [4].
US President Donald Trump was set to swear in Kevin Warsh as the new Federal Reserve chair on Friday, succeeding Jerome Powell, whose term expired but who had been serving pro-tempore until the transition [1][4].
CONCLUSION
The US Dollar's resilience is underpinned by hawkish Fed expectations and persistent geopolitical risks, particularly in the Middle East. Commodity-linked and emerging market currencies, including the Canadian Dollar, New Zealand Dollar, and Indian Rupee, remain pressured by lower commodity prices and energy supply concerns. Markets are closely watching US-Iran negotiations and Fed policy signals for further direction.