The U.S. dollar remained near a 10-day low against major global currencies on Monday after the United States and Iran announced a preliminary agreement aimed at ending months of conflict, easing tensions in the Middle East and reopening the strategically important Strait of Hormuz.
The development triggered a sharp decline in oil prices and increased investor appetite for riskier assets, as markets reacted positively to the prospect of reduced geopolitical tensions.
Officials from both Washington and Tehran confirmed on Sunday that they had agreed on a framework for a deal designed to end hostilities, lift the U.S. blockade on Iran and restore shipping activities through the Strait of Hormuz, a vital route for global energy supplies.
The memorandum of understanding is expected to be formally signed in Switzerland on Friday. However, investors remain cautious as negotiations on several key issues, including Iran’s nuclear programme, are still ongoing.
The announcement immediately affected commodity markets, with Brent crude futures falling by nearly five per cent to around $82.90 per barrel.
Meanwhile, the U.S. Dollar Index, which measures the greenback against a basket of major currencies including the euro and Japanese yen, stood at 99.52, hovering around its weakest level since June 5.
Nick Rees, Head of Macro Research at Monex Europe, said market participants were reluctant to fully embrace optimism until more details emerge.
“There’s plenty of room to be disappointed here,” he said. “Crucially, we haven’t heard anything on the nuclear side. If that comes through over the next few days, then I think we can be a bit more constructive.”
“But without a nuclear agreement, I don’t think we can simply assume that any deal’s going to hold. So we are cautiously optimistic, but that warrants a relatively small FX reaction,” Rees said.
The euro gained 0.32 per cent to trade at $1.1605, while the British pound rose 0.16 per cent to $1.3428. Both currencies remained close to their strongest levels since June 5.
The Japanese yen was largely unchanged at 160.10 per dollar, staying near the level widely viewed by investors as a potential trigger point for intervention by Japanese authorities.
Attention is now shifting to a series of key central bank decisions scheduled this week, with investors assessing how easing geopolitical tensions could influence inflation outlooks and monetary policy decisions.
Major institutions including the U.S. Federal Reserve, the Bank of Japan, the Bank of England and the Reserve Bank of Australia are all expected to announce interest rate decisions in the coming days.
The Federal Reserve is widely expected to leave interest rates unchanged within the 3.5 per cent to 3.75 per cent range when policymakers conclude their meeting on Wednesday. However, investors will closely watch comments from Federal Reserve Chair Kevin Warsh for signals about future policy direction.
Market expectations for another U.S. rate hike this year have weakened considerably. According to CME FedWatch data, traders now see roughly a 50 per cent chance of a rate increase in December, down from more than 70 per cent a week ago.
Prashant Newnaha, Senior Rates Strategist at TD Securities in Singapore, said the emerging peace agreement could reduce concerns about rising inflation.
“Negotiations on aspects of the deal are ongoing, but no doubt central bankers will be breathing a sigh of relief, for now at least, that the upside risks to inflation appear to be receding and not becoming the central scenario,” he said.
In Japan, the Bank of Japan is expected to raise interest rates to one per cent at the conclusion of its policy meeting on Tuesday, marking the highest level in more than three decades. Policymakers are also expected to signal their willingness to continue tightening policy despite easing geopolitical risks.
Meanwhile, both the Reserve Bank of Australia and the Bank of England are widely expected to keep their benchmark interest rates unchanged as they continue to monitor global economic conditions and inflation trends.
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