(May 6): The dollar extended a decline, erasing its gains since the start of the war in the Middle East, after a report said the US and Iran are nearing an agreement to end the conflict.
The Bloomberg Dollar Spot Index fell as much as 0.8% to its lowest since Feb 26. Axios reported that the White House believes it is close to reaching an agreement with Iran on a one-page memorandum of understanding to end the war and set a framework for more detailed nuclear negotiations.
The greenback weakened against almost all major currencies following the report while US stock futures rallied and oil prices slid. The US currency had already been under pressure after another sudden surge in the yen.
“The latest headlines mark a significant shift in the narrative and are likely to be taken as a clear positive by markets,” said Daniela Hathorn, senior market analyst at Capital.com, adding that investors are likely to lean further into “glass-half-full” positioning, continuing to unwind some of the worst-case scenarios that had been priced in.
Currencies that had strengthened since early March on the back of rising oil prices, including the Canadian dollar and Norway’s krone, also came under pressure.
See also: Fed’s Kashkari says next rate move uncertain because of Iran war
The dollar’s return to pre-war levels comes as optimism over a possible resolution weighs on energy prices and saps demand for haven assets. The yield on US 10-year notes slipped nearly nine basis points to 4.34% while Brent futures fell 7% to US$102 a barrel, the lowest in almost two weeks.
Options pricing shows investors are no longer betting with conviction on dollar gains over the next week. A gauge of demand for bullish versus bearish dollar trades is at its least favourable level for the greenback since late February.
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