On Friday, global financial markets responded to US President Donald Trump's announcement that the United States would not launch military strikes against Iran before the upcoming midterm elections, citing ongoing 'productive discussions' with Tehran. Trump also highlighted that record volumes of crude oil were passing through the Strait of Hormuz and confirmed that the US naval blockade of Iranian ports would remain in place. However, subsequent reports indicated that the US had already prepared plans for targeted strikes against Iranian energy infrastructure, missile stockpiles, and strategic sites, revealing some uncertainty in the geopolitical outlook [1][3][5].
The announcement contributed to a decline in crude oil prices, with West Texas Intermediate (WTI) falling about 0.5% to trade near $90 per barrel [3]. This drop in oil prices weighed on commodity-linked currencies such as the Canadian Dollar (CAD), although the EUR/CAD cross rebounded to around 1.5960, halting a four-day losing streak as French bond yields also retreated from multi-decade highs. Despite the pullback, French yields remained elevated due to ongoing political deadlock, and Eurozone finance ministers, along with the ECB, urged France to pass its 2027 budget swiftly to restore stability [1].
In the broader currency markets, the US Dollar (USD) weakened against most major peers, with the USD Index retreating toward 102.00 after marginal losses. The Canadian Dollar strengthened against the USD, with USD/CAD declining to around 1.4220 as the yield gap between US and Canadian two-year bonds narrowed to 152 basis points from 158 bps earlier in the week. Rabobank strategists noted that policy divergence between the US and Canada remains a key driver, forecasting a widening differential to 200bp by year-end and projecting USD/CAD could reach 1.45 in three months. Despite weak Canadian economic activity, the OIS curve implies nearly four more Bank of Canada hikes by September next year [2][3].
Market sentiment improved, as evidenced by rising US stock index futures (up 0.1% to 0.6%) and a stronger Australian Dollar, which outperformed its peers and traded 0.35% higher against the USD. Analysts attributed the upbeat mood to a sharp correction in US Treasury yields following a strong 30-year bond auction and dovish signals from Fed Governor Christopher Waller, who stated that further rate hikes 'do not need to come at consecutive meetings.' This dovish tilt led to a decline in market expectations for a Fed rate hike at the upcoming meeting to 17.7%, down from 38% a week prior, though the probability for a December hike remains high at 83% [3][4][5].
The Indonesian Rupiah also strengthened as domestic retail sales expanded by 1.3% year-over-year in August, the fastest pace since March, and as the USD lost safe-haven demand amid the improved risk environment [5].
CONCLUSION
President Trump's assurance of no imminent US-Iran conflict and dovish Fed commentary triggered a risk-on shift, easing oil prices and bond yields. This environment supported risk assets and commodity currencies, while the US Dollar retreated broadly. Market participants remain attentive to upcoming economic data and central bank policy signals for further direction.