USD: Peace progress and Oil slide weigh – MUFG

MUFG’s Derek Halpenny notes that renewed hopes for a peace deal with Iran and a sharp drop in Brent crude Oil are pressuring the US Dollar (USD), with risk appetite supported by strong global equities and AI-driven gains. Suspected Japanese intervention has driven USD/JPY sharply lower, while resilient China data boosts the Australian Dollar (AUD) and New Zealand Dollar (NZD).

Peace hopes, Oil slump hit Dollar

"The plan by the US to guide shipping vessels through the Strait of Hormuz (Project Freedom) has been abandoned before it ever really got going with President Trump citing the “Great Progress made toward a Complete and Final Agreement” with Iran that has helped to fuel renewed hopes of a peace deal to end the conflict. Brent crude oil has gapped lower this morning and is now down 6% from the peak yesterday. That has fuelled renewed US dollar selling, reinforced by the continued positive momentum in global equities."

"How the Middle East plays out will be crucial on whether upside momentum in USD/JPY fades. While there is optimism today over progress toward peace that could change suddenly at any time."

"If action has been taken today, the selling of the US dollar would have been reinforced by the decline in crude oil prices and increased hope of progress toward a peace deal. But we believe there remains a danger that these bouts of intervention could prove the least successful of any of the previous periods of intervention mentioned above. The Japanese authorities are more at the mercy of unpredictable factors than in the past."

"Signs of continued China resilience have also helped undermine the dollar. The Australian and New Zealand dollars are the top performing G10 currencies today with the China PMIs stronger than expected fuelled by strong services. Ultimately whether the drop in crude oil prices can hold and progress can be made in resolving the conflict in the Middle East will determine whether the dollar selling will extend further over the short-term although other macro factors are certainly helping."