Dollar stumbles as optimism from fragile Israel-Iran truce lingers

The dollar struggled to regain lost ground on Wednesday as investors who have been starved of good news latched onto optimism over a fragile truce between Israel and Iran as a reason to take on more risk.

Markets were jubilant and an index of global shares hit a record high overnight as a shaky ceasefire brokered by US President Donald Trump took hold between Iran and Israel.

The two nations signalled the air war between them had ended, at least for now, after Trump publicly scolded them for violating a ceasefire he announced.

Investors heavily sold the dollar in the wake of the news, after pouring into the safe-haven currency during the 12 days of war between Israel and Iran that also saw the US attack Iran's uranium-enrichment facilities.

Currency moves were more subdued in early Asia trade on Wednesday though the euro remained perched near its highest since October 2021 at $1.16 (R20.60), having hit that milestone in the previous session.

Sterling eased 0.02% to $1.361 but was similarly not far from Tuesday's peak of $1.364, which marked its strongest level since January 2022.

The risk-sensitive Australian dollar, which rallied sharply in the previous session, last traded 0.02% higher at $0.64.

While the truce between Israel and Iran appeared fragile, investors seemed to welcome any reprieve.

“The market is complacent about some of the downside risks,” said Joseph Capurso, head of international and sustainable economics at Commonwealth Bank of Australia.

“The thing I get is this issue is not over, which means it could come back to be a driver of commodity prices and currency markets again.”

In other currencies, the New Zealand dollar rose 0.13% to $0.60, while the yen steadied at 144.96 per dollar.

Some Bank of Japan policymakers called for keeping interest rates steady for the time being due to uncertainty over the impact of US tariffs on Japan's economy, a summary of opinions at the bank's June policy meeting showed on Wednesday.

The Swiss franc, which scaled a 10-1/2-year high on Tuesday, steadied at 0.80 per dollar.

Against a basket of currencies, the dollar eased slightly to 97.91.

While Federal Reserve chair Jerome Powell stuck to his cautious approach and reiterated  the central bank was in no rush to ease rates at his semi-annual testimony to Congress on Tuesday, markets continue to price in a roughly 18% chance that the Fed could cut in July, according to the CME FedWatch tool.

“We think economic growth is slowing and the improvement in services and shelter inflation will push back against tariff rises, allowing cuts to resume in September,” ANZ analysts said in a note.

A raft of weaker than expected US economic data in recent weeks have bolstered expectations of Fed cuts this year, with futures pointing to nearly 60 basis points worth of easing by December.

Data on Tuesday showed US consumer confidence unexpectedly deteriorated in June as households grew increasingly worried about job availability, another indication that labour market conditions were softening.

The two-year US Treasury yield, which typically reflects near-term rate expectations, fell to a 1-1/2-month low of 3.7870% on Wednesday.

The benchmark 10-year yield was little changed at 4.3043%.

Reuters