The dollar fell against all its major counterparts after the United States and Iran agreed to a two-week ceasefire, weakening demand for one of the most prominent safe-haven assets during the conflict, coinciding with a decline in oil prices.
The Bloomberg Dollar Index fell as much as 0.97% to a four-week low, as the agreement contributed to lower Treasury yields, reducing support for the currency. The dollar has given up more than half of its gains since the war began and weakened further against risk-sensitive currencies like the South African rand and the Swedish krona, which each rose by about 2%.
Crossing the Strait of Hormuz is a test for the market.
Chris Turner, head of foreign exchange strategy at ING, said: “A 50% correction seems like a logical and initial target for most currencies.” He added: “This means that highly sensitive commodity-linked and emerging market currencies could see a recovery of around 2% during the day (from their recent lows), while less sensitive currencies could achieve gains of between 0.5% and 1.0%.”
Iran said the ceasefire agreement means it will guarantee the safe passage of ships through the Strait of Hormuz for two weeks, helping to secure greater supplies of oil and other goods to global markets.
Rodrigo Catril, a strategist at National Australia Bank in Sydney, said: “The path of least resistance supports risk appetite, which puts pressure on the dollar and lifts risk assets.” He added: “For markets, the real test will be the ability of ships to pass safely through the strait, and as time passes and data emerges, we can assess the inflationary impact of the conflict so far.”
Improved sentiment puts pressure on the dollar.
The dollar had risen since the start of the war in late February, supported by its appeal as a safe haven, as well as by the belief that the US economy was better able to absorb a global energy shock given its status as a net exporter of oil.
The Chinese yuan rose to a three-year high against the dollar following news of a ceasefire and after the People's Bank of China strengthened the currency's daily reference rate at the fastest pace in a month. The euro also climbed nearly 1% to $1.1709, its highest level in over a month.
The options markets also reflected this shift in sentiment, with traders quickly reducing their positions that had been betting on a stronger dollar. While the US currency still maintains an upward bias in the options market, this bias has weakened to its lowest level in a month.
