US Dollar Could Weaken if Two Middle East Conditions Materialise

Global financial markets are currently awaiting a crucial decision from US President Donald Trump regarding a potential extension of the ceasefire between the US and Iran. This move is predicted to be a key catalyst for major currency movements, particularly the US dollar and euro. MUFG Bank analyst Derek Halpenny stated in his latest report that the US dollar could weaken if Trump approves the agreement followed by the reopening of the Strait of Hormuz. However, he noted that normalising traffic in the strait might take time if Iran needs to clear mines first. On the other hand, ING’s Francesco Pesole projects the euro could strengthen over 1% against the dollar if the Strait of Hormuz reopens. However, for the euro to hold above $1.1800, a more favourable short-term interest rate differential between the US and Eurozone will be required. Axios reports that US and Iranian negotiators have agreed on a 60-day ceasefire Memorandum of Understanding (MoU). However, confirmation of the deal still awaits final approval from the White House. Treasury Secretary Scott Bessent stated that while the framework exists, approval depends on meeting key conditions set by the US. Vice President JD Vance also told the BBC that both sides are still working to resolve critical points. Uncertainty has led Asian currencies, including potential impacts on the rupiah exchange rate, to consolidate as geopolitical risks moderate but have not fully shifted to risk-on sentiment. Markets remain on hold, as reopening the vital trade route in the Strait of Hormuz will significantly determine global energy inflation and future central bank monetary policies. (WSJ/I-2) Trump’s trade threats towards Europe over Greenland have increased the likelihood of European governments reducing their US asset holdings. The rupiah suddenly strengthened to Rp8,170.65 per US dollar on Google search engine. The rupiah’s exchange rate against the euro also showed similar results. Several factors influence the rupiah’s exchange rate, such as national economic conditions where Indonesia’s economic growth, inflation, and interest rates affect it. Brent and WTI crude oil prices have sharply declined amid hopes of an end to the US-Iran conflict. Asian and European stock markets have responded positively. Saudi analyst Mubarak al-Ati said Saudi Arabia no longer trusts US protection and is leading the formation of a new Arab-Islamic bloc. The Iranian Revolutionary Guard Corps (IRGC) Navy fired warning shots at four ships near the Strait of Hormuz. Meanwhile, the US threatened to impose sanctions on Oman. The Bloomberg Dollar Index fell 0.2% after reports of a 60-day MoU between the US and Iran regarding ceasefire and access to the Strait of Hormuz. US and Iranian negotiators reached a 60-day MoU to extend the ceasefire and discuss nuclear programmes, awaiting Donald Trump’s approval.