Dollar Slips on Hopes for US-Iran Peace Talks to Resume

The dollar index (DXY00) on Monday fell by -0.05%.  The dollar fell from a 2.5-week high on Monday and finished lower after Axios reported that Iran has offered a new proposal to reopen the Strait of Hormuz.  The dollar initially moved higher in overnight trade after President Trump canceled planned negotiations with Iran in Pakistan.  Higher crude oil prices on Monday increased inflation expectations, a hawkish factor for Fed policy, and positive for the dollar. 

Heightened US-Iran tensions are boosting demand for the dollar as a safe-haven.  The US and Iran are locked in a battle for control of the Strait of Hormuz, with both sides blocking the waterway to gain leverage during an extended ceasefire. 

Axios reported that Iran has given the US a new proposal to reopen the Strait of Hormuz and end the war.  The plan calls for extending the ceasefire so the parties can work toward a permanent end to the war, and nuclear talks would come later, only after a US blockade of the strait is lifted.  The White House said Monday afternoon that President Trump is discussing the proposal with national security and foreign policy officials.

Swaps markets are discounting the odds at 0% for a +25 bp rate hike at the Tue-Wed FOMC meeting.

The dollar continues to be undercut by a poor outlook for interest rate differentials, with the FOMC expected to cut interest rates by at least -25 bp in 2026, while the BOJ and ECB are expected to raise rates by at least +25 bp in 2026. 

EUR/USD (^EURUSD) on Monday rose by +0.03%.  The euro posted modest gains on Monday amid dollar weakness. Gains in the euro were limited on Monday after the German May GfK consumer confidence index fell more than expected to a 3.25-year low.  Also, Monday’s +2% increase in crude oil prices is negative for the Eurozone economy and the euro, as Europe imports most of its energy needs. 

The German Apr IFO business confidence index fell -1.9 to a nearly 6-year low of 84.4, weaker than expectations of 85.7.

Swaps are discounting a 6% chance of a +25 bp rate hike by the ECB at Thursday’s policy meeting.

USD/JPY (^USDJPY) on Monday rose by +0.02%.  The yen posted modest losses on Monday after the Nikkei Stock Index rallied to a new record high, which reduced safe-haven demand for the yen.   Also, Monday’s +2% increase in crude oil prices is negative for the Japanese economy and the yen, as Japan imports more than 90% of its energy needs.  In addition, higher T-note yields on Monday weighed on the yen.

Losses in the yen were limited as Monday’s upward revision in the Feb leading index CI to a 3.5-year high was supportive of the yen.  Higher Japanese government bond yields also boosted the yen’s interest rate differentials after the 10-year JGB bond yield rose to a 2.5-week high of 2.478% on Monday. 

The Japan Feb leading index CI was revised upward by +0.9 to a 3.5-year high of 113.3 from the previously reported 112.4.

The markets are discounting a +3% chance of a 25 bp BOJ rate hike at the next meeting on Tuesday.

June COMEX gold (GCM26) on Monday closed down -47.20 (-1.00%), and May COMEX silver (SIK26) closed down -1.389 (-1.82%).

Gold and silver prices fell sharply on Monday.  Reduced safe-haven demand for precious metals weighed on precious metals prices on Monday after a report from Axios said that Iran has given the US a new proposal to reopen the Strait of Hormuz and end the war.  Also, Monday’s +2% jump in crude oil prices raises inflation expectations and may prompt the world’s central banks to pursue tighter monetary policies, a bearish factor for precious metals. 

Monday’s weaker dollar was supportive of precious metals prices.  Also, heightened Middle East tensions are positive for safe-haven demand of precious metals as both the US and Iran are maintaining blockades of the Strait of Hormuz.  In addition, precious metals remain supported by uncertainty over US tariffs, US political turmoil, large US deficits, and government policy uncertainty, which are boosting demand for precious metals as a store of value.

Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 4.5-month low on March 31 after climbing to a 3.5-year high on February 27.  Also, long holdings in silver ETFs fell to an 8.25-month low last Friday after rising to a 3.5-year high on December 23.

Strong central bank demand for gold is supportive of gold prices, following the recent news that bullion held in China’s PBOC reserves rose by +160,000 ounces to 74.38 million troy ounces in March, the seventeenth consecutive month the PBOC has boosted its gold reserves.