By Jiaxing Li
HONG KONG, May 29 (Reuters) – The dollar was firm against other major currencies on Friday, but on track to end the week lower, after reports the U.S. and Iran reached an agreement to extend the ceasefire in the Middle East and lift restrictions on shipping through the Strait of Hormuz.
The deal, still pending Trump’s approval, would extend the truce for another 60 days and allow traffic to flow through the strategic waterway while negotiators tackle difficult issues such as Iran’s nuclear program, four sources told Reuters.
Oil futures fell more than 1% on Friday and were on track for their steepest weekly decline since early April. The dollar was heading toward ending the week 0.3% lower, snapping two weeks of gains.
“Geopolitical risk premia may continue to unwind in the near term,” said Lloyd Chan, senior currency analyst at MUFG Global Markets Research.
Although renewed tensions are likely to keep markets sensitive in the near term, the balance of probabilities still points toward de-escalation, with both the U.S. and Iran appearing incentivised to pursue a diplomatic resolution, he added.
The euro and the pound traded flat at $1.1642 and $1.3435, respectively. The Australian dollar was a shade higher at $0.7165.
The New Zealand dollar rose 0.4% to $0.5960, near the strongest level in more than two weeks, extending the recent rally after the country’s central bank governor signalled earlier and steeper rate hikes were likely.
The dollar index, which measures the greenback against a basket of currencies, was largely rangebound. It last traded at 99.045 after dipping 0.2% on Thursday.
“It might well be that once this crisis in Iran, in the Middle East, is behind us, we expect the U.S. dollar to remain weak,” said Massimiliano Castelli, head of strategy in the global sovereign markets team at UBS Asset Management.
The conflict has temporarily paused the dollar weakness due to demand for safe havens, but many investors remain keen to diversify away from U.S. dollar assets, he said.
U.S. inflation increased at its fastest pace in three years in April, driven by higher energy prices due to the Iran war and cementing economists’ views that the Federal Reserve will hold interest rates unchanged well into next year.
The Japanese yen traded at 159.30, pulling away from the psychologically significant 160-per-dollar level that has previously led to interventions by Japanese authorities.
Data on Friday showed annual core inflation in Japan’s capital stayed below the central bank’s 2% target for a fourth straight month in May, while factory output rebounded in April. Analysts said that cemented the case for a Bank of Japan rate hike next month.
(Reporting by Jiaxing Li; Editing by Jamie Freed)
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