The U.S. dollar traded close to a 10-day low against major global currencies on Monday as investor sentiment improved following a preliminary peace agreement between the United States and Iran, easing concerns over prolonged conflict in the Middle East and sending oil prices sharply lower.
Financial markets reacted positively after Washington and Tehran announced a framework agreement aimed at ending months of hostilities, lifting the U.S. blockade on Iran and reopening the strategic Strait of Hormuz, a critical route for global energy supplies.
The proposed memorandum of understanding is expected to be formally signed in Switzerland later this week, although investors remain cautious as negotiations on key issues, including Iran’s nuclear programme, are still ongoing.
The easing geopolitical tensions triggered a broad retreat in oil prices, with Brent crude falling about five per cent to around $82.90 per barrel, reducing inflationary concerns that had weighed on global markets in recent months.
The dollar index, which tracks the U.S. currency against a basket of major peers including the euro and Japanese yen, stood at 99.52, hovering near its weakest level since June 5.
Market analysts said investors were welcoming signs of de-escalation but remained wary of declaring a lasting breakthrough until more details of the agreement emerge.
Nick Rees, Head of Macro Research at Monex Europe, noted that while the framework agreement was encouraging, uncertainty surrounding Iran’s nuclear activities could still affect the durability of the deal.
“There is still significant room for disappointment. The nuclear aspect remains unresolved, and that will likely determine whether markets become more confident in the sustainability of the agreement,” he said.
The euro strengthened by 0.32 per cent to $1.1605, while the British pound rose 0.16 per cent to $1.3428, with both currencies trading near their strongest levels in nearly two weeks.
Meanwhile, the Japanese yen remained relatively stable at 160.10 per dollar, staying close to a level that market participants view as a potential trigger for intervention by Japanese authorities.
Attention is also turning to a busy week for global central banks, with monetary policy decisions expected from the U.S. Federal Reserve, the Bank of Japan, the Bank of England and the Reserve Bank of Australia.
Investors are assessing whether easing geopolitical risks and falling energy prices could lessen inflationary pressures and influence future interest rate decisions.
The Federal Reserve is widely expected to leave interest rates unchanged at its policy meeting on Wednesday. However, market participants will closely monitor comments from Fed Chair Kevin Warsh for signals on the direction of monetary policy in the months ahead.
Expectations for additional U.S. rate increases have weakened following the apparent progress toward a peace deal. Market pricing now suggests roughly a 50 per cent chance of a rate hike in December, down from more than 70 per cent a week ago.
Prashant Newnaha, Senior Rates Strategist at TD Securities, said central bankers would likely welcome signs that inflation risks linked to the Middle East conflict are beginning to ease.
“While negotiations are still continuing, policymakers will be relieved that the upside risks to inflation appear to be receding rather than becoming the dominant economic scenario,” he said.
In Japan, the Bank of Japan is expected to raise its benchmark interest rate to one per cent, marking its highest level in more than three decades, while maintaining a tightening stance to address persistent inflation pressures.
The coming days are expected to provide clearer indications of how both geopolitical developments and central bank decisions will shape global financial markets during the second half of the year.
