The US Dollar (USD) stabilized against major currencies during the European session on Tuesday, following a period of weakness on Monday, as geopolitical tensions in the Strait of Hormuz escalated due to US military actions in southern Iran [1][2]. The USD was particularly strong against the New Zealand Dollar, gaining 0.34%, and also posted gains against the Euro (0.08%), British Pound (0.17%), and Japanese Yen (0.11%) [1]. The Canadian Dollar (CAD) struggled against the USD, with the USD/CAD pair trading around 1.3810 during Asian hours, as safe-haven demand for the USD offset gains from higher crude oil prices [2].
The escalation followed reports that the US military conducted 'self-defense strikes' targeting Iranian missile launch sites and mine-laying vessels in southern Iran on Monday [1][2]. The US Central Command stated these actions were aimed at protecting US forces, while maintaining restraint during the ongoing ceasefire [2]. Iran's Fars news agency reported that a senior Iranian Armed Forces spokesperson warned that any new aggression would be met with a 'far more severe' response extending beyond the region [1].
Despite these tensions, markets remained cautiously optimistic about a potential peace deal between the US and Iran. Negotiations were reportedly ongoing in Doha, with Qatari mediators facilitating talks to finalize a memorandum of understanding (MOU), though language regarding Iran's nuclear program and sanctions remained contentious [1]. US President Donald Trump was quoted as saying that negotiations to end the conflict and reopen the Strait of Hormuz were 'proceeding nicely' [2].
On the commodities front, West Texas Intermediate (WTI) crude oil prices rebounded to around $91.50 per barrel after four days of losses, driven by renewed supply concerns following the US strikes in Iran [2]. The USD/CAD pair held steady as safe-haven flows into the USD and expectations of a hawkish Federal Reserve outlook supported the greenback. According to the CME FedWatch tool, market participants are pricing in a nearly 41.0% probability of a 25-basis-point Fed rate hike by year-end, with traders awaiting upcoming PCE inflation data for further policy signals [2].
Key upcoming data releases include the US Conference Board's Consumer Confidence Index for May and the Dallas Fed Manufacturing Business Index, both scheduled for later in the day [1].
CONCLUSION
Geopolitical tensions in the Strait of Hormuz and US military actions in Iran have bolstered safe-haven demand for the US Dollar, which remains resilient against major peers, including the Canadian Dollar. While oil prices have rebounded on supply concerns, market sentiment is cautious as negotiations between the US and Iran continue. The market's focus now shifts to upcoming US economic data and Federal Reserve policy expectations.