Dollar Dips Amid Middle East Peace Hopes and Lower Oil Prices
Market Reactions to Middle East Developments and Oil Prices
By Ankur Banerjee
Investor Optimism and Geopolitical Tensions
SINGAPORE, May 26 (Reuters) - The dollar nursed losses on Tuesday on rising investor optimism of a deal being struck to reopen the crucial Strait of Hormuz and end the three-month-long Iran war, although fresh U.S. attacks on Iranian targets weighed on sentiment.
Despite low odds of an imminent deal, hopes of peace have pushed oil below $100 a barrel, eased pressure on emerging-market currencies, and boosted risk sentiment.
Diplomatic Efforts and U.S. Response
Iran's top negotiator and its foreign minister were in Doha for talks with Qatar's prime minister on a potential deal. U.S. President Donald Trump said talks with Iran were going "nicely", but warned of fresh attacks if they failed.
The U.S. Central Command said in a statement it had carried out fresh strikes designed "to protect our troops from threats posed by Iranian forces."
Currency Markets and Analyst Insights
The euro held onto its gains to trade at $1.16365 on Tuesday, while the Japanese yen fetched 158.95 per U.S. dollar. U.S. markets were closed on Monday for a holiday. Against a basket of currencies, the dollar was at 99.031.
Expert Commentary on Market Sentiment
"Markets are right to price some optimism because even a path toward reopening Hormuz lowers the extreme tail risk around oil, inflation and global growth," said Charu Chanana, chief investment strategist at Saxo in Singapore.
Risks and Cautions
"I would not confuse positive negotiation noise with a durable de-escalation yet, the real test is not the headline deal, but whether tankers can move freely, insurance premiums can fall, and energy flows can normalize," Chanana added.
"Until then, this is likely to remain a stop-start risk-on trade."
Performance of Other Major Currencies
The Australian dollar, often viewed as a proxy for risk, was steady at $0.71665, hovering near a one-week high after rising 0.65% on Monday.
The New Zealand dollar was at $0.58575, down 0.25% ahead of a policy decision from the country's central bank on Wednesday, where a Reuters poll shows 28 of 29 economists expect no change.
Market Reactions and Analyst Perspectives
"With so much of the good news around a peace deal now likely priced into risk markets, there's certainly room for a 'buy the rumour, sell the fact' type reaction," said Tony Sycamore, market analyst at IG.
Oil Prices and Inflation Concerns
Oil prices clawed back some of their losses at the start of trading on Tuesday on news of the fresh U.S. strikes on Iranian targets. Brent crude futures rose 1.5% to $97.76 per barrel after dropping 7% on Monday. [O/R]
Outlook for Energy Prices and the Dollar
Analysts don't see energy prices returning to pre-war levels anytime soon, even with a near-term resolution, as supply chains will take time to normalise, keeping inflation and rate concerns firmly in place.
"We still expect a slow oil unwind, even if prices fall sustainably below $100 per barrel in the second half of 2026. This suggests the USD’s terms of trade support should not fade quickly," said OCBC strategists in a note.
U.S. Dollar Strength and Economic Factors
"There is no strong case to be bearish USD," they said, citing resilient U.S. growth and AI-driven inflation pressures that have nudged Federal Reserve rhetoric in a more hawkish direction.
(Reporting by Ankur Banerjee in SingaporeEditing by Shri Navaratnam)
