Senior officials have indicated that the United States and Iran are nearing an agreement to reopen the Strait of Hormuz, with a deal likely to be signed by the weekend in Geneva, according to a Bloomberg report cited by fxstreet [1]. The agreement is expected to take the form of a memorandum of understanding (MoU) rather than a final deal, as stated by a G7 official [1]. Iranian authorities have confirmed that no final decision has been made, but Foreign Ministry spokesperson Esmail Baghaei said the document is 'closer to being approved than ever before' [2]. The deal, pending approval by Tehran, would prevent Iran from developing a nuclear weapon and allow the reopening of the Strait of Hormuz, a key waterway for about 20% of global crude supply [2].
Market reaction has been swift, with the US Dollar Index (DXY) experiencing a sharp correction due to hopes surrounding the US-Iran MoU. As of writing, the DXY trades flat around 99.65 after giving back early gains [1], and is currently at 99.60, just above one-week lows, on track for a 0.35% weekly decline [2]. The anticipation of a peace deal has undermined speculative demand for the safe-haven USD, as investors shift towards risk assets amid a brighter market mood [2]. Previously, the DXY rallied about 3% following the US-Israel attack on Iran, acting as the market's safe-haven asset during regional tensions [2]. Analysts suggest that a durable peace agreement and normalization of sea traffic through Hormuz could further increase risk appetite and potentially send the DXY to pre-war levels around 97.50 or lower [2].
On the macroeconomic front, US Producer Price Index (PPI) data released on Thursday was mixed. The headline PPI accelerated to 6.5% year-on-year in May, exceeding expectations of 6.4%, while the core figure remained unchanged at 4.9%, below market expectations of 5.4% [2]. This suggests that the spillover from the energy shock may have been contained, which reduces expectations for Federal Reserve rate hikes [2].
US President Donald Trump commented that he cancelled plans for a third day of attacks on Iran after a breakthrough in negotiations, further feeding optimism for a peace deal [2]. Iranian officials continue to study the document, and G7 leaders are set to meet next week, potentially coinciding with the signing of the agreement [1][2].
CONCLUSION
The prospect of a US-Iran peace deal and reopening of the Strait of Hormuz has triggered a risk-on sentiment, leading to a notable decline in the US Dollar Index. While the agreement is not yet finalized, market participants are optimistic, and analysts anticipate further USD weakness if a durable deal is reached. Mixed US PPI data also tempers expectations for Fed rate hikes, reinforcing the shift away from safe-haven assets.