US dollar holds firm as US-Iran talks calm oil fears, Fed bets rise

The US dollar started the week with a familiar advantage: investors wanted shelter, but not outright safety.

A fragile diplomatic track between the US and Iran reduced the worst fears around Gulf shipping, yet the currency market was still shaped by oil risk, higher Treasury yields and fresh political noise in Britain.

The greenback held steady on Monday after high-level talks in Switzerland produced a 60-day roadmap for a broader agreement.

The plan, backed by mediators Qatar and Pakistan, includes further technical discussions and a channel aimed at protecting commercial shipping through the Strait of Hormuz.

Risk premium shifts from oil to FX

Crude initially found support after Iran said it had closed the waterway, but prices later eased as both sides signalled progress.

Brent traded below $80 a barrel, suggesting energy traders had trimmed the immediate supply premium.

Currency investors were more cautious.

The reason is simple. Even with talks alive, the path to a final deal remains uncertain.

Shipping flows through Hormuz have already slowed, and any renewed threat to cargo movement would quickly feed back into oil, inflation expectations and rate markets.

Currency strategists said FX and gold flows were likely to remain tied to the energy complex until traders see proof that vessels can move freely.

That kept the dollar supported against most major peers. The euro slipped to about $1.146, while the Australian dollar eased towards $0.700.

The New Zealand dollar also remained under pressure, reflecting the broader preference for US assets at the start of the week.

Fed repricing keeps yen under strain

The yen again looked like the weakest link. It traded near 161.5 per dollar, close to levels that have previously drawn warnings from Tokyo.

A move beyond 161.96 would put the currency near its weakest level since 1986.

Japan’s finance ministry repeated that it was ready to respond to excessive currency moves, but the market is testing that resolve.

Analysts said intervention would be difficult while US yields are rising and the Fed is sounding more hawkish.

Two-year Treasury yields climbed to their highest level since early 2025, with traders pricing a full quarter-point Fed increase by September and around 43 basis points of tightening this year.

That rate gap leaves the yen exposed, even if the threat of official action slows the move.

UK politics drags on sterling

Sterling carried its own domestic burden. The pound fell around 0.2% to $1.3205 as traders watched Prime Minister Keir Starmer’s position after Andy Burnham’s decisive path into parliament revived questions over Labour’s leadership.

The market concern is not only political drama. Investors are focused on whether any leadership shift would bring looser fiscal rules, higher borrowing and more pressure on gilts.

Strategists said such a turn would probably weigh on the pound.

For now, the dollar’s strength rests on three supports: Middle East uncertainty, rising US yields and doubts elsewhere. None looks ready to disappear quickly.