Dollar Steady as Iran Talks Begin, Yen Weakens
SINGAPORE – The dollar remained stable on Monday as initial discussions between the United States and Iran boosted investor optimism about a potential agreement. Meanwhile, the yen declined, approaching a historic low, which heightened concerns regarding possible intervention from Japan.
A joint statement from Qatar and Pakistan indicated that the U.S. and Iran have laid out a roadmap for finalizing a deal within 60 days. This has spurred hopes of resolving a dispute that has impacted global inflation and interest rate forecasts.
However, the atmosphere became more tense when President Donald Trump threatened to renew military action in the Middle East, coupled with Iran’s announcement about blocking the crucial Strait of Hormuz.
The two nations reportedly found common ground on ceasing hostilities in Lebanon and opened communication lines for safe passage of commercial ships through the disputed strait.
Oil prices saw a nearly 2% drop following this news, with Brent crude trading at approximately $79.09 per barrel.
“Cash markets are still tight, which might offer some support,” mentioned Chris Weston, head of research at Pepperstone. “However, foreign exchange and commodity flows will largely react to developments in the energy sector.”
The British pound decreased by 0.22% to $1.3209 as traders reacted to political instability in the UK, especially with Prime Minister Keir Starmer contemplating his political future after Andy Burnham’s significant win in a parliamentary by-election.
Currency strategists at OCBC don’t anticipate a substantial widening of the pound’s initial negative response, maintaining a neutral outlook on the currency.
“Current signals imply that Burnham will likely stick to the existing financial framework, but execution will be more critical than the guidance itself,” as noted by sources.
Yen Nearing 40-Year Low
The euro was last at $1.14555, down 0.15% for the day. The Australian dollar, sensitive to risk, dipped 0.17% to $0.7005, while the New Zealand dollar was at $0.57275.
The Japanese yen continued to draw attention, weakening to 161.66 yen against the dollar, nearing its two-year low from the previous week. If it surpasses 161.96 yen, it would hit levels not seen since 1986.
Japan’s Finance Minister Satsuki Katayama stated that the government is prepared to respond to currency fluctuations at any moment.
“The Treasury may be concerned about the dollar/yen rising to 2024 highs,” said Matt Simpson, a senior market analyst at StoneX. “Yet, they might feel powerless to act, as intervention could be costly and ineffective given the Federal Reserve’s aggressive stance and strong U.S. fundamentals.”
The yen’s previous gains, following interventions since the end of April—where the Japanese government spent a record 11.7 trillion yen—have diminished as traders anticipate interest rate increases this year due to the Federal Reserve’s policies.
Shen Li, head of APAC foreign exchange sales at State Street, noted that the dollar/yen dynamics are fundamentally driven by interest rate differentials. “A lot of attention is on how the Federal Reserve will adjust its policies. I think the upward pressure on USD/JPY will carry on.”
U.S. Treasuries faced continued pressure on Monday, with the two-year yield reaching 4.2276%, its highest since early 2025. Traders are anticipating a 43 basis point rate hike this year, with a 25 basis point increase already priced in for September.
The dollar index, which compares the U.S. currency against six others, stood at 100.9, just below its one-year high from last week. The index has increased about 2.7% this year, supported by flows into safe-haven assets and the expectation that interest rates will remain elevated for a prolonged period.
