The US Dollar (USD) experienced notable weakness against both the Japanese Yen (JPY) and the Euro (EUR) during the Asian session on Tuesday, driven by renewed hopes for diplomatic progress between the US and Iran despite failed peace talks over the weekend [1][2]. US Vice President JD Vance indicated that meaningful progress has been made in negotiations, which encouraged investors to move towards riskier assets and undermined the USD's reserve currency status [1][2]. As a result, the USD/JPY pair extended its pullback, dropping to the 159.00 mark, while the EUR/USD pair climbed to the 1.1765-1.1770 region, its highest level since early March [1][2].
The weakening of the USD was further exacerbated by uncertainty over future interest rate moves by the US Federal Reserve (Fed). Recent data showed US inflation surged by the most in nearly four years, prompting speculation about potential rate hikes; however, traders have not fully abandoned expectations for rate cuts, especially as signs of de-escalation in geopolitical tensions persist [1]. Despite this, the instability in the Strait of Hormuz remains a significant risk factor. US President Donald Trump announced that the US Navy blockade of the strategic waterway has officially started and vowed to destroy Iranian warships that approach, to which Iran responded with threats against all ports in the Persian Gulf and Gulf of Oman [1][2].
For the Japanese Yen, while it strengthened against the USD and was the strongest against the Australian Dollar among major currencies, economic concerns related to Japan's reliance on Middle Eastern oil imports and the potential for external energy shocks due to Hormuz instability limited aggressive bullish bets on the JPY [1]. Speculation that Japanese authorities might intervene to prevent further Yen weakness also capped the currency's gains [1].
In the case of the Euro, the EUR/USD pair's uptrend was supported by the same USD weakness and optimism around Iran diplomacy, but analysts cautioned that ongoing geopolitical risks and the possibility of renewed conflict could lend support to the USD and limit further EUR gains [2]. The fundamental backdrop, however, was seen as supportive of an extension of the EUR/USD's recent uptrend from its late March swing low [2].
CONCLUSION
The US Dollar's decline against both the Yen and the Euro was driven by optimism over Iran diplomacy and uncertainty regarding US monetary policy, despite persistent geopolitical risks in the Strait of Hormuz. While the Euro and Yen benefited from USD weakness, ongoing instability and energy concerns are likely to keep market volatility elevated. Investors remain cautious, with further moves dependent on developments in US-Iran relations and Fed policy signals.