By Hannah Lang
NEW YORK, April 8 (Reuters) – The dollar sank to its lowest level in a month against a basket of major currencies on Wednesday after the U.S. and Iran agreed to a two-week ceasefire that injected optimism into risk assets worldwide.
Still, the truce appeared to be fragile, and the dollar rebounded from its earlier lows as Iran struck Gulf neighbours’ oil facilities while Israel launched its biggest attacks yet on Lebanon.
Wednesday’s currency moves coincided with a dramatic rally in stocks and government bonds, as investors’ risk appetite returned after the ceasefire was announced less than two hours before President Donald Trump’s deadline for Tehran to reopen the Strait of Hormuz would have expired. [MKTS/GLOB]
The euro rose 0.54% to $1.1696, after earlier touching its highest level since early March, while the pound gained 0.78% to $1.3395. The dollar slid 0.6% against the yen to 158.675.
The dollar has been the major beneficiary of the Iran war among currencies, in part because the U.S. is a net energy exporter and therefore less exposed to the economic hit that oil importers like Japan and many European countries might face.
The five-week war has shaken investor confidence as it led to the largest-ever disruption of global oil and gas supply. The uneasy détente leaves Iran with more control over shipping through the crucial strait than it had prior to the war, analysts have said, after Trump backed off his threats to attack Iran’s civilian infrastructure.
Already, Iran’s Parliament speaker Mohammad Baqer Qalibaf said on Wednesday that three key clauses of its 10-point proposal were violated before negotiations set to start on Friday in Pakistan, adding that in such a situation, a bilateral ceasefire or negotiations were unreasonable.
“Yes, oil prices have retreated. Yes, the dollar has given back some of its gains. But I would be cautious in terms of chasing it at this point,” said Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets.
“Obviously, people are reluctant to put a lot of will behind this relief rally because there are so many caveats and so many uncertainties and so many potential hurdles to go through between now and any eventual resolution,” he said.
Trump had drawn international condemnation after issuing an extraordinary warning that “a whole civilization will die” if his demands were not met by Tuesday evening. He backed off his threat shortly before attacks were set to begin.
Trump said the deal was subject to Iran’s agreement to pause its blockade of energy supplies through the strait, the transit point for about one-fifth of global oil and gas shipments. A senior Iranian official involved in the discussions told Reuters Tehran could open the strait on Thursday or Friday ahead of talks.
The dollar index, which measures the greenback’s performance against a basket of six currencies, was last up 0.16% at 99.077. The dollar is still above where it was prior to the onset of the war, showing investor sentiment has not fully recovered.
“The moves can be quite temporary, but at least at this moment, it makes sense to counter the March resurgence of the dollar based on optimism and based on this development,” said Juan Perez, senior director of trading at Monex USA.
A key effect of the surge in energy prices has been a rapid shift in expectations among investors for higher interest rates this year to contain any pickup in inflation. With the steep drop in oil on Wednesday , traders were once again pricing a 50% chance of a Federal Reserve rate cut by the end of this year, having earlier seen no such move.
The New Zealand dollar rose 1.5% to $0.5817, extending gains after the Reserve Bank of New Zealand kept its policy rate at 2.25% on Wednesday for a second straight meeting, though it signaled it is ready to act if inflation pressures intensify.
Bitcoin was last up 2.95% at $71,342.
(Additional reporting by Gregor Stuart Hunter in Singapore; Editing by Kim Coghill, Joe Bavier, Toby Chopra, Paul Simao and David Gaffen)
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