The US dollar retreated from a six-week high on Wednesday, May 20, as hopes grew that the United States may be nearing a deal with Iran to end the conflict in the Middle East.
US President Donald Trump said negotiations with Iran were in the final stages, while also warning that further attacks could follow if Tehran does not agree to a deal.
The dollar index, which tracks the greenback against a basket of major currencies, fell 0.12% to 99.19. The euro rose 0.1% to $1.1616, while sterling gained 0.22% to $1.3423. The Australian dollar strengthened 0.52% to $0.7146.
Despite the pullback, the dollar remained supported by rising US Treasury yields and expectations that the Federal Reserve may keep interest rates higher for longer.
The benchmark 10-year US Treasury yield touched a 16-month high on Tuesday, while the 30-year yield rose to its highest level since 2007.
“The increase in the bond yields can be explained by the increase in expectations for the overnight rate at the end of the year,” said Marc Chandler, chief market strategist at Bannockburn Global Forex.
Fed funds futures traders are now pricing in roughly 50% odds of a Federal Reserve rate hike by December, marking a sharp reversal from expectations before the Iran war began, when markets had expected rate cuts this year.
The yen also remained under pressure, with the dollar-yen pair moving close to levels that previously triggered intervention by Japanese authorities. The Japanese yen was last at 158.88 per dollar.
“We’re waiting for the Japanese response. We’re fishing for their pain threshold,” Chandler said.
Currency traders are watching whether Japan may step in again if the yen moves closer to the 160 level. Tokyo had intervened in late April and early May to slow the yen’s decline, although the impact was short-lived.
Christopher Wong, currency strategist at OCBC, said intervention risk could make markets cautious about pushing dollar-yen higher, but added that official action may only slow the move unless US Treasury yields and the broader dollar weaken.
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