U.S. dollar wobbles on uncertainty over Iran-US talks
The dollar benefited in March from safe-haven flows as the war erupted but shed most of those gains on hopes of a peace deal this month
The U.S. dollar wobbled on Monday as wavering hopes of a deal to end the Middle East war left investors on edge in a week when they will also be looking for direction from central bank policymakers on the impact of the war.
The U.S. president scrapped a visit to Islamabad by his envoys over the weekend, saying Iran could reach out if it wanted to negotiate an end to the two-month war, leaving the pivotal Strait of Hormuz effectively closed.
But sentiment got a lift after Axios reported, citing sources, that Iran offered the U.S. a new proposal through Pakistani mediators on reopening the waterway and ending the war, with nuclear negotiations postponed for a later stage.
The dollar index was at 98.465, down 0.18%.
The dollar benefited in March from safe-haven flows as the war erupted but shed most of those gains on hopes of a peace deal this month. It has steadied in recent days after Iran-U.S. talks stalled.
I have been surprised that the markets are so confident, perhaps even blase, about progress in talks and the prospect of a peace deal, said Kyle Rodda, senior financial analyst at Capital.com, noting the markets are priced for peace.
The peace might not hold and if it doesn’t the markets will have to re-price quite violently, Rodda said.
Although a ceasefire has paused full-scale fighting in the war, which began with U.S.-Israeli strikes on Iran on February 28, no agreement has been reached to end the war, keeping shipping through the Strait of Hormuz at a standstill.
Investors will be watching several central bank meetings this week to gauge the impact of the war on prices and rate outlooks, with the Bank of Japan expected to keep rates steady on Tuesday but signal its readiness to hike as soon as June.
Gregor Hirt, global CIO for multi asset at Allianz Global Investors, said the resumption of the hiking cycle hinges on geopolitical stabilisation, noting that if tensions eased and the Strait of Hormuz became navigable again, hikes could be back on the table by summer.
He said: However, investors should not expect aggressive signalling at the April meeting. Instead, the BOJ will likely favour a strategy of incremental guidance to preserve optionality under uncertainty.