As U.S. President Donald Trump released positive signals that the U.S.-Iran conflict may be nearing an end, market safe-haven sentiment cooled significantly, leading the U.S. dollar to suffer its largest single-day decline in over a month. During the New York trading session on Thursday, the Bloomberg Dollar Spot Index fell 0.3%, marking its biggest one-day drop since May 6. Earlier, Trump announced the cancellation of a new round of military strikes against Iran and stated that the two sides were close to reaching a peace agreement.
In response to this news, risk appetite in international financial markets quickly rebounded, international oil prices fell sharply, U.S. Treasury prices rose, while the traditional safe-haven dollar was sold off. Trump stated that negotiations between the U.S. and Iran have made significant progress, and a relevant agreement is expected to be formally signed in the coming days. Once the agreement is reached, the Strait of Hormuz will return to normal navigation. Market participants generally believe that a easing of tensions in the Middle East will significantly reduce the risk of global energy supply disruptions, thereby weakening investor demand for safe-haven assets. Alex Cohen, a currency strategist at Bank of America, noted that market expectations for the imminent conclusion of a peace agreement are heating up, putting pressure on the dollar.
Since the U.S. and Israel launched military operations against Iran in late February this year, the U.S. dollar (no specific stock code provided for related assets) has benefited from safe-haven capital inflows, rising approximately 1.6% in total. During Thursday’s dollar pullback, the simultaneous decline in international oil prices further exacerbated the dollar’s drop. However, options market data shows that investors remain relatively optimistic about the dollar’s future trajectory. Although the cost of options used to hedge against upside risks for the dollar over the next month has declined, the overall level still indicates that the market favors the dollar’s medium- to long-term performance.
Analysts point out that market attention has gradually shifted from geopolitical risks to the outlook for U.S. monetary policy. Recent U.S. employment data has remained strong, and inflation levels are still above the Federal Reserve’s target. Market expectations for the Fed to maintain high interest rates or even raise rates further this year have warmed significantly. Therefore, even if a U.S.-Iran detente reduces some safe-haven demand, the relative resilience of the U.S. economy and higher interest rate levels may still provide support for the dollar. In the coming days, whether the U.S. and Iran can formally reach an agreement and whether the Strait of Hormuz can return to normal operation will be key variables affecting global financial markets and the dollar’s trend.
