US dollar steadies as Iran peace hopes and Fed rate risks jolt FX markets

The dollar steadied in Asian trading on Friday after suffering a sharp late-session reversal, as investors balanced hopes of a Middle East ceasefire against a still-uncertain path for US interest rates.

The US currency edged up to about 160.07 yen, recovering some ground after falling to its weakest level in a week.

The Australian and New Zealand dollars slipped slightly after gaining against the greenback overnight, while sterling was little changed near $1.34.

The euro held close to a one-week high around $1.1576, supported by the European Central Bank’s first rate increase since 2023.

The move has sharpened the contrast between Europe’s increasingly hawkish inflation stance and a Federal Reserve outlook that remains sensitive to incoming data.

Gulf headlines reset the tone

Foreign-exchange markets turned late in the US session after President Donald Trump cancelled planned strikes on Iran and said a peace agreement could be signed as soon as this weekend.

The prospect of a deal that could reopen the Strait of Hormuz to shipping sent oil prices lower and eased some of the inflation premium that had built into global markets.

Brent crude fell as trading resumed in Asia, extending the relief move triggered by the latest diplomatic signals.

Iran, however, has said it has not reached a final decision on any agreement, leaving traders wary of chasing the move too far.

The dollar’s stabilisation reflected that caution. A confirmed deal could further reduce energy-price risks, but any breakdown in talks would quickly return geopolitical stress to the centre of currency trading.

PPI details calm inflation fears

US producer-price data added another layer to the dollar debate.

Headline producer prices rose more than expected in May, recording the strongest annual gain in three and a half years as energy costs climbed.

Yet traders took some comfort from the underlying figures. Core producer-price inflation, which feeds into the Fed’s preferred personal consumption expenditures gauge, came in below forecasts.

That helped limit concerns that the central bank would need to move more aggressively.

Markets are still pricing in a Fed rate increase later this year, though expectations have shifted as oil prices retreat and inflation fears cool.

The next few weeks of energy and price data will be crucial in deciding whether the Fed can wait or must tighten again.

ECB shift supports the euro

The ECB’s 25-basis-point rate increase gave the euro an additional lift.

Policymakers also sounded cautious on inflation, with higher energy costs and weaker growth complicating the outlook for the currency bloc.

Markets now expect another ECB move as early as September, though officials offered limited guidance on the timing of any follow-up increase.

For currency traders, the result is a more complicated map: a dollar supported by residual Fed risk, a euro underpinned by a hawkish ECB, and oil-sensitive currencies still hostage to every turn in the Middle East talks.