The euro and British pound climbed to their highest levels in more than a week on Monday after an interim peace agreement between the United States and Iran reduced demand for the U.S. dollar as a safe-haven asset.
The shift came ahead of a busy week for global central banks, with several major interest rate decisions due across the United States, Europe and Asia.
U.S. Dollar Falls as Safe-Haven Demand Weakens
The U.S. Dollar Index declined by 0.2% to 99.52. This marked its third consecutive session of losses.
Meanwhile, the EUR/USD and GBP/USD currency pairs rose to their highest levels since June 5.
During periods of war and geopolitical uncertainty, investors often move money into the dollar because of its safe-haven status. However, the preliminary peace agreement encouraged traders to reduce those defensive positions.
U.S. and Iran Agree on Peace Framework
Washington and Tehran agreed on a framework designed to end the conflict, remove the U.S. blockade of Iran and reopen the Strait of Hormuz.
The Strait is one of the world’s most important routes for transporting crude oil and other energy products.
Representatives from both countries are expected to meet in Switzerland on June 19 to formally sign the agreement.
The prospect of reopening the Strait has reduced concerns about disruptions to global energy supplies.
Falling Oil Prices Put Pressure on the Dollar
Brent crude oil prices fell sharply following news of the agreement. Global government bond yields also moved lower.
Cheaper oil reduced fears that higher energy costs would cause another persistent rise in inflation. It also weakened concerns about stagflation, which combines elevated inflation with slowing economic growth.
These developments removed some of the support that the dollar had received during the conflict.
Russ Mould, investment director at AJ Bell, said markets had finally received the news they had been waiting for since the conflict began in March. He added that an end to the Iran war now appeared to be more clearly in sight.
Lower Energy Costs Could Support the Euro
The decline in energy prices could provide additional support for the euro.
Europe imports a significant share of its energy. Therefore, lower oil prices could reduce the region’s import costs and improve its economic outlook.
A lower energy bill could also ease inflation, support consumer spending and reduce pressure on European businesses.
As a result, the euro may have an opportunity to recover some of the ground it lost during the conflict.
Central Bank Decisions Move Into Focus
With the so-called “war trade” beginning to unwind, investors are now turning their attention to a series of central bank meetings.
Interest rate decisions are expected this week from the United States, Japan, Switzerland, Sweden, Norway and Australia.
The Bank of England is also expected to announce its latest monetary policy decision.
Although the immediate rate decisions remain important, investors will closely examine how policymakers adjust their future guidance following the peace agreement and the sharp decline in oil prices.
Federal Reserve Expected to Hold Rates Steady
The Federal Reserve is widely expected to leave interest rates unchanged.
However, markets will carefully review the Fed’s updated economic projections, including its closely watched “dot plot.” This chart shows where policymakers expect interest rates to move in the future.
Investors will also monitor Federal Reserve Chair Kevin Warsh’s press conference for clues about inflation, economic growth and future monetary policy.
According to the CME FedWatch tool, traders now see a 49% probability of a Federal Reserve interest rate increase by December. That figure has fallen from 69% one week earlier.
The decline suggests that easing energy prices and reduced inflation concerns have lowered expectations for tighter monetary policy.
Bank of Japan Could Raise Rates to 1%
The Bank of Japan is expected to increase its benchmark interest rate to 1% on Tuesday, June 16.
Such a move would lift Japan’s policy rate to its highest level in more than 30 years.
The Japanese yen gained approximately 0.1% against the dollar as traders prepared for the decision.
By contrast, the Reserve Bank of Australia, the Bank of England and the Swiss National Bank are expected to keep their current interest rates unchanged.
The risk-sensitive Australian dollar also benefited from improving market sentiment. The AUD/USD pair advanced around 0.4%, reaching its highest level in more than a week.
The dollar’s near-term direction may now depend on how central banks respond to lower oil prices, easing geopolitical risks and changing inflation expectations.
