The US dollar remained stable on Monday amid fluctuating hopes for a resolution to the ongoing Middle East conflict, leaving the Japanese yen hovering just below the critical 160 mark ahead of the Bank of Japan’s policy meeting later in the week.
US President Donald Trump canceled a delegation’s planned visit to Islamabad over the weekend, indicating that Iran could reach out if it wished to negotiate an end to the two-month conflict, which has effectively closed the Strait of Hormuz.
However, market sentiment improved following a report from Axios, which cited sources indicating that Iran has presented a new proposal to the US through Pakistani intermediaries. This proposal includes plans to reopen the waterway and conclude the hostilities, with nuclear discussions postponed for future consideration. The euro recovered from earlier losses, trading flat at $1.1724, while the British pound was at $1.3536, also bouncing back slightly. The dollar index, which measures the US currency against six major counterparts, stood at 98.491.
The dollar saw safe-haven demand following the outbreak of the war in March but has receded significantly in recent days due to optimistic expectations regarding a peace agreement. Kyle Rodda, a senior financial analyst at Capital.com, expressed surprise at the market’s confidence in the prospects for a peace deal. “The markets are priced for peace,” he noted, adding that “If it doesn’t hold, the markets will have to re-price quite violently.”
A ceasefire has temporarily halted large-scale hostilities, which began with US-Israeli strikes on Iran on February 28. However, no formal agreement has been made to conclude the conflict, causing persistent investor unease. The ongoing war has led to rising oil prices, increased inflation, and raised concerns over global growth. Analysts warn that as long as the Strait of Hormuz, which typically handles a fifth of global oil and gas shipments, remains obstructed, the risks to the global economy will continue to escalate.
Brent crude futures rose by 1% to $106.70 per barrel, while US West Texas Intermediate climbed 1.2% to $95.53 per barrel.
Shane Oliver, chief economist and head of investment strategy at AMP in Sydney, commented, “While a bout of mild stagflation is baked in, the clock is now ticking on whether this turns into a more severe bout like that seen in the 1970s.”
Investor attention this week will likely center on a series of central bank meetings that will assess the impacts of the conflict on pricing and interest rate outlooks. The Bank of Japan is expected to maintain its current interest rates during Tuesday’s meeting but may signal an eagerness to increase them as early as June.
Contrary to last year when escalated US tariffs paused its rate hikes, the BOJ is set to emphasize its commitment to further rate increases in light of the energy shock fueling broad inflation, as sources told Reuters.
The Japanese yen traded at 159.51 per US dollar, just shy of the pivotal 160 level that could prompt intervention from Tokyo. Since early March, the yen has been stuck within the 159 range, as investors evaluate the influence of the oil crisis on Japan’s economy and the potential trajectory of BOJ policies. Gregor Hirt, global CIO for multi-asset at Allianz Global Investors, stated that resuming the rate hike cycle hinges on stabilizing geopolitical conditions. He noted that should tensions ease and the Strait of Hormuz become operable again, interest rate hikes may re-emerge as an option by summer.
“However, investors should not expect aggressive signaling at the April meeting. Instead, the BOJ is likely to adopt a strategy of incremental guidance to maintain flexibility in uncertain conditions,” Hirt added.
The Federal Reserve, European Central Bank, and Bank of England are all widely anticipated to hold interest rates steady this week, with markets keenly awaiting insights from policymakers regarding the conflict’s impact on economic conditions and future interest rate paths.
