The U.S. dollar weakened as easing geopolitical tensions reduced safe-haven demand, prompting an unwinding of long positions, and it remained within its recent range.
The U.S. dollar came under pressure on Wednesday after the U.S. and Iran clinched a provisional ceasefire agreement mediated by Pakistan, marking a deescalation in a conflict that has raged on for over a month. U.S. President Donald Trump called the 10-point proposal put forward by Iran as “workable,” paving the way for a temporary halt (two-week) in hostilities even as broader negotiations continue.
The unwinding of the geopolitical risk premium has dampened demand for safe-haven assets such as the dollar, while risky bets such as equities rallied.
Dollar Range-bound: The U.S. Dollar Index futures (DX) has been rangebound since April last, moving in a 96.26-100.38 range. After hitting the lower end of the range in late January this year, the DX contract embarked on an upward trajectory as traders began factoring in a rate pause by the Federal Reserve.
The Iran conflict also increased greenback’s safe-haven appeal. The return of the risk-on sentiment saw the unwinding of some of the dollar long positions, exerting downward pressure on the U.S. currency.
Dollar Index futures (1-Year Chart)
Source: TradingView
Welcome Retreat: ING Forex Strategist Chris Turner called the dollar’s decline as a “welcome retreat.” The strategist noted that most currencies fell 2%-5% against the dollar in March.
Turner noted that as traffic flow through the Strait of Hormuz resumes and volume picks up significantly, oil prices could fall further, and reverse the stagflationary investment trends seen last month. The West Texas Intermediate (WTI) grade crude oil futures contract (CL) fell more than 17% in the early New York session on Wednesday.
Danish investment bank Saxo Global Head of Macro Strategy John Hardy said, “Risk sentiment will need to continue to stabilize to see a sustained move lower in the greenback, as it wouldn’t take much of a reversal from here to throw everything back into uncertainty.”
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