The dollar index (DXY), which measures the greenback against a group of six major currencies, saw its earlier gains diminish on Thursday. This shift seemed to come as traders responded to fresh geopolitical developments concerning US-Iran negotiations. After peaking at about 99.54, a high not seen in seven weeks, the index is now hovering around 99.
Initially, the US dollar strengthened amid escalating tensions between the US and Iran, which typically drives up demand for the dollar as a safe-haven asset. But then, news from Axios indicated that a 60-day interim agreement had been reached between the two nations to extend the current ceasefire. Though this deal still requires the final nod from President Donald Trump, who has requested a few days for deliberation.
Nevertheless, there’s still a lot of uncertainty. The two countries haven’t yet solidified a final agreement, largely due to ongoing disputes over Iran’s nuclear ambitions, the lifting of sanctions, and control over the Strait of Hormuz. Adding to this, earlier reports from Iran’s Tasnim news agency mentioned that unfreezing Iranian assets is part of the ongoing discussions.
On the economic front, disappointing US inflation data further pressured the dollar. The core personal consumption expenditures (PCE) price index, a key inflation marker recommended by the Federal Reserve, increased by 0.2% month-on-month in April, following a 0.3% rise in March. The annual rate edged up from 3.2% to 3.3%, which was what many were anticipating.
While inflation data has slightly softened, it still remains above the Fed’s target of 2%. Simultaneously, rising oil prices highlight looming inflation risks, causing some to speculate that the Federal Reserve might need to maintain interest rates for a longer period.
St. Louis Fed President Alberto Moussallem shared his outlook on Thursday, suggesting that it might take longer for inflation to align with target levels. He also mentioned the possibility that the economy could require rate increases. Moussallem expressed concern, noting that if disinflation isn’t observed in the upcoming quarters, it could signal problems. Additionally, he hinted at a scenario where economic growth might slow down in the latter half of the year.
