MUFG’s Lee Hardman notes that the US Dollar has extended losses after the US and Iran reached an interim agreement to end conflict and reopen the Strait of Hormuz. The deal is expected to ease global economic risks and support a further reversal of prior Dollar gains, especially if the Fed under Kevin Warsh keeps rates on hold and avoids a hawkish surprise.

Dollar softens on Middle East deal

"The US Dollar has continued to weaken at the start of this week driven by the announcement over the weekend that the US and Iran have finally reached an interim agreement to end the conflict and reopen the Strait of Hormuz."

"For the US Dollar more broadly, the deal should encourage a further reversal of gains recorded during the conflict although market participants will be wary of building short positions ahead of the FOMC meeting on Wednesday given the risk of a hawkish policy update."

"The US rate market has already moved to scale back Fed rate hike expectations, but there is room for US yields and the US Dollar to fall further if Kevin Warsh does not provide a hawkish policy surprise this week."

"The main risk to our view is that he indicates that the Fed is actively considering raising rates."

"The deal should help to reduce the risk of a more disruptive outcome for the global economy and financial markets."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)