The dollar had towered in March as one of the few bastions of safety as the U.S. and Israeli war on Iran sent oil prices surging and hit stocks and gold, while inflation worries pressured bonds.
But since a fragile ceasefire was agreed on Tuesday, those positions are being unwound.
The euro has rallied 1.8% this week to trade at $1.17255, while sterling has gained 2% since Monday to $1.346.
The risk-sensitive Australian and New Zealand dollars are set for weekly rises of nearly 3% on the dollar, with the Aussie trading just above 70 cents.
MARKETS ARE OPTIMISTIC EVEN THOUGH CEASEFIRE IS FRAGILE
“The market still seems generally optimistic, despite some of the ceasefire fraying,” said Marc Chandler, chief market strategist at Bannockburn Global Forex.Data on Friday showed that U.S. consumer prices rose by the most in nearly four years in March as the war with Iran boosted oil prices and the pass-through from tariffs persisted.
The increase was largely in line with expectations and the markets’ direction is more likely to hinge on the outcome of weekend peace talks between the U.S. and Iran in Islamabad, analysts said.
“People were buying the U.S. dollar when the war was at its most intense moment and now they’re selling as the tail risk of a really bad outcome has faded quite a bit,” said Jason Wong, senior strategist at BNZ in Wellington.
“Even though it still looks a bit shaky, the ceasefire removing that tail risk is important from a sentiment point of view,” he said, adding that the mood could turn very quickly if the anticipated weekend peace talks fail to deliver progress.
POSITIVE TALKS WOULD BE NEGATIVE FOR THE DOLLAR
“If there are positive talks, that would be dollar-negative. And if we get to Monday and talks went badly and there’s still a lack of ships … things could turn around quickly,” said Wong.
There has been little progress so far in the Strait of Hormuz. In the first 24 hours of the ceasefire, just a single oil products tanker and five dry bulk carriers sailed through the passage that before the war accommodated about 140 ships a day.
The yen, under pressure for years from Japan’s low rates and more recently from its vulnerability to high oil prices, rose above its lows against the dollar – but not by much, and was sold against other currencies.
The yen slipped to 159.75 per dollar on Friday. The U.S. dollar index dipped 0.24% and was 1.6% lower so far this week.
China’s yuan, which has not fallen significantly since the Iran war began on February 28, was set for its biggest weekly rise in 15 months and is trading at its strongest levels since 2023.
Data on Friday showed factory gate prices rose for the first time in three years, a sign that inflation may be beginning to take hold after a long period of deflation.
“The CNY has been a surprising winner of the Iran war, despite China’s role as the largest oil importer in the world,” said ING economist Lynn Song.
