Dollar Stays on Back Foot as Markets Bet on Easing Iran Tensions

By Wayne Cole

SYDNEY, May 7 (Reuters) — The dollar stayed on the defensive on Thursday, as cautious optimism over a potential de-escalation in the Iran-U.S. conflict lifted currencies tied to oil exports, while Japan stepped up its verbal intervention to support the yen, keeping traders wary of sudden moves.

Iran said Wednesday it was reviewing a U.S. peace proposal that, according to sources, would formally end hostilities but leave unresolved key American demands — including a suspension of Iran’s nuclear program and the reopening of the Strait of Hormuz. Analysts warned that any agreement that fails to restore shipping through the vital waterway could push oil prices higher again. Brent crude edged up 0.8% in early trade to $101.89, still well above pre-war levels.

“It remains far from clear that there is any material movement toward reopening the Strait, or if we are instead stuck in a rebranded ‘ceasefire with no oil’ purgatory,” wrote Helima Croft, head of global commodity strategy at RBC Capital Markets. “A corner of the market will undoubtedly view a one-page memorandum to resume negotiations over the next thirty days as significant progress. However, an MoU is unlikely to translate into an immediate resumption of shipping traffic and major production restarts.”

Hopes for a diplomatic breakthrough had already sent oil prices sliding nearly 8% overnight, easing inflation fears and dragging U.S. Treasury yields lower as markets dialed back expectations of Federal Reserve rate hikes. The pullback in crude gave a boost to the euro, which is particularly sensitive to energy costs given Europe’s heavy reliance on imported oil. The single currency rose 0.1% to $1.1757, after touching a two-week high of $1.1797 overnight.

The dollar index slipped to as low as 97.902, not far from its two-week trough and well below last week’s peak of 99.092. The risk-sensitive Australian dollar edged up to $0.7242, hovering just below a four-year high hit on Wednesday.

Sterling held steady at $1.3594 ahead of key local elections. Global investors are watching closely, wary that a poor result for the ruling Labour Party could trigger an unwelcome leadership challenge and renew concerns about fiscal discipline. The pound has gained nearly 7% since Labour’s 2024 general election victory, and options markets suggest a relatively calm outlook for the vote.

The yen strengthened further amid speculation that Japanese authorities stepped in to buy the currency on Wednesday, pushing the dollar as low as 155.00 — its strongest level in 10 weeks. The dollar was last trading at 156.15 on Thursday, with dealers on high alert after Japan’s top currency diplomat Atsushi Mimura said the country was not constrained in its intervention options. U.S. Treasury Secretary Scott Bessent is set to meet Japan’s Prime Minister Sanae Takaichi next week, with the Nikkei reporting they will discuss curbing speculative yen selling, among other issues.

Sources told Reuters that authorities intervened on Thursday last week, with money market data suggesting they sold about $35 billion to support the yen. Since then, the market has seen three abrupt yen spikes through Wednesday. Still, analysts remain skeptical the yen can hold its gains.

“Without stronger BOJ follow-through via consecutive hikes to address its behind-the-curve stance, the yen is likely to remain weak in the near term,” said Masahiko Loo, senior fixed income strategist at State Street Investment Management. “Repeated interventions raise the likelihood of broader policy action in the June–July window, consistent with the late 2024 playbook.”

Market Voices:

“This whole ‘peace proposal’ feels like a band-aid on a bullet wound. Iran’s not giving up its nuclear program, and the U.S. knows it. Oil’s going to spike again the second someone sneezes in the Gulf.” — James T. Holloway, independent energy trader in London

“The yen intervention is a stopgap, not a solution. Japan is fighting market gravity with a water pistol. Unless the BOJ starts hiking in earnest, we’ll be back at 160 before summer.” — Yuki Nakamura, currency strategist at Mitsubishi UFJ Financial Group, Tokyo

“I’m actually more optimistic than most. The fact both sides are even talking is a huge step. If we get a real reopening of the Strait, you’ll see a massive unwind of the war premium in oil and a dollar sell-off that’s been building for weeks.” — Sarah Chen, portfolio manager at BlackRock’s emerging markets desk, Singapore

(Reporting by Wayne Cole; additional reporting by Ankur Banerjee in Singapore; Editing by Kim Coghill)