The US Dollar Index (DXY) weakened to near 99.05 during Asian trading hours on Monday, as optimism over a potential US-Iran peace deal buoyed risk appetite and reduced demand for the safe-haven US Dollar [1]. US President Donald Trump stated that Washington and Iran had 'largely negotiated' a memorandum of understanding on a peace deal that would reopen the Strait of Hormuz, according to Reuters [1]. An Axios report cited by another source indicated that the US and Iran are close to signing an agreement involving a 60-day ceasefire extension, reopening the Strait of Hormuz, and Iran clearing mines in exchange for the US lifting its blockade on Iranian ports [2]. However, both sources note that there is still a lack of clarity and unresolved issues, particularly regarding the reopening of the Strait and Tehran's nuclear program, which has kept market enthusiasm in check [1][3].
The weakening of the US Dollar had notable effects on major currency pairs. The NZD/USD pair traded around 0.5870, holding gains as the US Dollar lost ground on fading safe-haven demand amid the US-Iran deal optimism [2]. Similarly, the AUD/USD pair opened with a modest bullish gap and maintained gains above the mid-0.7100s, moving away from its lowest level since April 14 [3]. Technical indicators for AUD/USD, such as a mildly positive Relative Strength Index near 58 and a gently positive MACD, suggest building upside momentum, though analysts caution that further gains may be capped unless there is follow-through buying beyond the 200-period Simple Moving Average [3].
Despite the risk-on sentiment, market participants remain cautious due to ongoing uncertainty about the timing and confirmation of the Strait of Hormuz reopening [1][3]. Additionally, expectations for US Federal Reserve policy continue to influence the market. Rising inflationary pressures have shifted expectations toward potential future interest rate hikes, with markets pricing in a 45.1% probability of a 25 basis point hike by year-end, according to the CME FedWatch tool [1]. Federal Reserve Governor Christopher Waller signaled that the central bank should no longer retain an easing bias in its policy statement, adding complexity to the outlook [2]. The upcoming US Personal Consumption Expenditures (PCE) - Price Index report, due Thursday, is highlighted as a key event that could impact the US Dollar if it shows hotter-than-expected outcomes [1].
Currency performance data shows that the US Dollar was weaker against most major currencies, including a -0.46% change against the Australian Dollar and -0.44% against the New Zealand Dollar, further illustrating the broad-based impact of the US-Iran peace deal optimism on forex markets [3].
CONCLUSION
Optimism over a potential US-Iran peace deal has weakened the US Dollar and boosted risk appetite, supporting gains in major currencies like the NZD and AUD. However, unresolved issues and ongoing uncertainty about the deal's implementation, combined with shifting expectations for US Federal Reserve policy, have kept market participants cautious. The upcoming US PCE report and further developments in US-Iran negotiations will be closely watched for their potential to drive further market moves.