The US dollar held near its lowest level in ten days on Tuesday as risk appetite improved following the announcement of a preliminary agreement to end the conflict between the United States and Iran. Meanwhile, the Japanese yen remained close to the key psychological level of 160 per dollar after the Bank of Japan raised interest rates as widely expected.
US President Donald Trump announced on Monday that Washington and Tehran had reached a preliminary agreement to end the conflict in the Middle East. However, uncertainty still surrounds the temporary deal, while shipping companies warned that restoring confidence could take weeks even after the Strait of Hormuz is reopened.
Investor attention this week is also focused on a series of major central bank meetings around the world.
The Bank of Japan raised interest rates to their highest level in 31 years during Tuesdays meeting, in line with market expectations. However, the 7-1 vote drew attention from analysts, as it highlighted some division regarding the timing of the next rate increase.
Investors also closely followed comments from Deputy Governor Shinichi Uchida, who said:
We will monitor economic developments, prices, and financial conditions, with particular attention to the situation in the Middle East. We will assess whether the economy and inflation are evolving in line with our expectations, as well as any potential risks. As underlying inflation approaches 2%, we must remain attentive to upside price risks and conduct monetary policy in a way that keeps pace with developments.
Derek Halpenny, Head of Global Markets Research for EMEA at MUFG, said:
Considering everything that was delivered in terms of data, messaging, and Uchidas comments, I think the outcome was about as hawkish as markets could reasonably have expected.
He added:
They clearly emphasized upside inflation risks, reiterated that monetary policy remains accommodative, and confirmed that their forward guidance remains unchanged, effectively leaving the door open for further rate hikes.
The yen was little changed at 160.26 per dollar, remaining close to the 160 level that traders view as a potential trigger for another round of intervention by Japanese authorities.
Global focus turns to central banks as uncertainty over the Iran agreement persists
Elsewhere, the Reserve Bank of Australia left interest rates unchanged in a unanimous decision after three consecutive rate increases, despite persistent inflation pressures. The Australian dollar slipped 0.1% to US$0.706.
Markets are also awaiting policy decisions from both the Bank of England and the US Federal Reserve later this week.
Despite cautious optimism following the Iran agreement and the sharp decline in oil prices, currency markets have reacted only modestly so far as investors wait for clearer guidance from central bank officials.
The US Dollar Index, which measures the greenback against a basket of six major currencies, was little changed at 99.62.
The euro edged up slightly to US$1.16, while sterling held steady at US$1.3418.
Analysts believe concerns over the normalization of global supply chains will keep investors cautious, especially given the ongoing uncertainty surrounding inflation and interest-rate expectations.
Analysts at ING said market reactions have moved ahead of developments on the ground and could shift depending on the ultimate success of the agreement.
They added:
A more sustainable repricing requires safe, predictable, and insurable shipping through the Strait of Hormuz. Demand may also remain unusually strong due to the need to rebuild depleted inventories. Escalation risks have diminished, but they have not disappeared entirely.