The dollar held firm on Monday as the first round of U.S.-Iran talks fuelled investor optimism for a deal, while the yen was stuck near 40-year lows and the pound slipped after UK Prime Minister Keir Starmer said he would resign. Mediating nations Qatar and Pakistan said the U.S. and Iran agreed to a roadmap towards a final deal to end their conflict within 60 days, although investors fretted about threats from U.S. President Donald Trump to restart the war in the Middle East and Tehran's announcement it had closed the vital Strait of Hormuz. Get a daily digest of breaking business news straight to your inbox with the Reuters Business newsletter.
"The physical market remains tight and that should provide some support, but flows in FX and commodities will continue to be heavily influenced by developments in the energy complex," said Chris Weston, head of research at Pepperstone. Sterling was down 0.1% at $1.322, not far off the lows for the day after Labour leader Starmer said he would resign, opening the way for rival Andy Burnham to possibly become the country's seventh prime minister in the 10 years since the Brexit vote. "At the moment, Andy Burnham is the favourite and he’s tried to reassure the gilt market that he will stick to the fiscal rules, and there are reports that he’s working with respected economists," said MUFG senior currency analyst Lee Hardman.
That has definitely provided some reassurance to investors and will limit the downside risks for the pound and gilts in the near term."
Meanwhile, the Japanese yen struggled around 161.73 to the dollar, just shy of a two-year low reached last week. A break beyond 161.96 would take the yen to its weakest level since 1986. Japanese Finance Minister Satsuki Katayama said on Monday that authorities were prepared to respond appropriately to currency moves at any time. "The MOF may be getting sore necks watching USD/JPY surge into the 2024 high," said Matt Simpson, senior market analyst at StoneX. "Yet they may also feel powerless to do anything about it — as intervening against the tide of a hawkish Fed and strong U.S. fundamentals could prove costly and futile."
The yen has erased gains made after a round of interventions from April 30, when Tokyo spent a record 11.7 trillion yen ($72.44 billion), as a hawkish tilt by the Federal Reserve has led traders to ramp up bets on rate increases this year. CIBC head of G10 currency strategy Jeremy Stretch said even if the BOJ raises rates more quickly, the fact that traders now see the Fed as likely to raise U.S. rates at least once this year means the dollar is likely to remain firm. "It's still the case that rate spreads are not particularly favourable, and if you're in a world where U.S. exceptionalism is still the watch-word, then the path of least resistance, outside of any intervention risk, would be for dollar/yen (to trade) higher," he said.
Investors have piled bullish dollar positions in the latest week. Data from the Commodity Futures Trading Commission shows speculators now have the biggest bet on a rising dollar in 16 months , worth nearly $30 billion.
The dollar index, which tracks the U.S. currency against six others, was at 101, around its highest in a year. The index is up nearly 3% this year, supported in part by expectations that interest rates will stay higher for longer.
