Key Takeaways:
The Australian dollar rose 0.6% against the greenback, and the Japanese yen also gained as reports of a potential U.S.-Iran peace agreement lowered risk premiums in global markets.
“The USD has weakened at the start of the week because President Trump announced a resolution of the U.S.-Iran war is near,” the Commonwealth Bank of Australia’s Global Economic & Markets Research team said in a research report. The potential for a deal, which could reopen the critical Strait of Hormuz, has traders pricing in lower oil prices and reduced inflation risk, benefiting risk-sensitive currencies.
The U.S. Dollar Index (DXY) eased to 99.27, while the Australian dollar climbed to $0.7166, according to LSEG data. The dollar also fell 0.2% against the Japanese yen to 158.85. The moves came after Iranian media reported a ceasefire proposal was completed, though official confirmations remain pending.
“Markets have become conditioned to be incredibly patient on a tangible breakthrough, but the base case of a deal remains firm,” said Chris Weston, head of research at Pepperstone Group. The primary issue for markets is the timing of the reopening of the Strait of Hormuz, which handles nearly 20% of global oil and gas flows. A reopening would likely lead to a significant drop in crude prices, easing inflationary pressures that have prompted central banks to consider tighter monetary policy.
The prospect of a U.S.-Iran accord has already sent ripples through commodity markets. Oil prices have been a key swing factor, with the potential for increased supply weighing on crude futures. A confirmed deal and a full reopening of the Strait of Hormuz would likely push oil prices lower, reinforcing the market’s risk-on sentiment. This would be a positive development for high-beta currencies like the Australian dollar and the Korean won, while potentially weighing on the U.S. dollar as safe-haven demand wanes.
However, some analysts remain cautious. “At this juncture, the Australian dollar’s break above the $0.7200 level requires something concrete—a signed framework and a formal [Strait of] Hormuz reopening announcement,” said Richard Franulovich, Head of FX Strategy at Westpac. The lack of a definitive timeline for the reopening of the waterway and the ongoing complexities of the nuclear negotiations are keeping some of the risk premium intact.
In Asia, the positive sentiment was widespread. The South Korean won gained 0.7% against the dollar, trading at 1,509.75. The Taiwan dollar and other regional currencies also saw gains. The improved risk appetite comes as a welcome relief for Asian economies that are heavily dependent on energy imports and have been grappling with the inflationary impact of the Middle East conflict.
For Japan, a net importer of energy, a sustained drop in oil prices would be a significant economic positive. While the Bank of Japan is still expected to raise its short-term policy rate to 1.0% in June, lower energy prices could give the central bank more flexibility in the months ahead. The yen’s strength reflects both the broader U.S. dollar weakness and the improved outlook for the Japanese economy in a lower oil price environment.
This article is for informational purposes only and does not constitute investment advice.
