- Rumors of a breakdown in negotiations have revived investor interest in the US dollar.
- The risk of new monetary interventions is increasing along with .
The US dollar rose 0.4% on Monday following reports that Iran intended to abandon negotiations with the United States. The threat from Tehran sent oil prices soaring and revived investor interest in safe haven assets. Strong macroeconomic data also favored the USD index bulls. However, in the absence of further rally, it gave back some of its gains, stabilizing at 99, roughly in the middle of the range seen over the past two weeks.
The ISM Manufacturing Business Activity Index beat forecasts and rose to 54, its highest level since May 2022. The Purchasing Managers' Index has remained in expansionary territory above 50 for the fifth consecutive month, indicating the strength of the sector. The price component of the PMI fell in May compared to April.
The strength of the US economy allows the Federal Reserve to adopt a wait-and-see strategy. The futures market puts the odds of the federal funds rate remaining unchanged in 2026 at 51%, with a 49% chance of an increase. According to Rabobank, these assessments suggest limited upside potential for the . The euro exchange rate already takes into account two ECB rate hikes. However, the longer the Strait of Hormuz remains closed, the more pain the eurozone economy will suffer.
So far, markets have been optimistic about the US-Iran deal. However, a partial escalation of the conflict, along with rumors that Tehran is withdrawing from negotiations, are making investors nervous. What happens if the current dialogue with the Islamic Republic ends like all the previous ones, that is, in failure?
As the USDJPY rises, the intensity of the government's verbal interventions increases. Finance Minister Satsuki Katayama is using the same rhetoric he used before the previous foreign exchange intervention. He states that the authorities are ready to take appropriate measures at any time, as necessary. Tokyo maintains close contacts with Washington regarding the situation in the Forex market.
Japan has colossal foreign exchange reserves of $1.17 trillion, which Goldman Sachs says would allow it to intervene in the market at least 30 times. However, a significant portion of these reserves consists of US Treasury bonds, the sale of which would increase their yields and is therefore not welcomed by the US Treasury.
He FxPro Analyst team
