The U.S. dollar declined on Tuesday, heading toward recording its seventh consecutive daily loss, as investor hopes increase for reaching a diplomatic solution to the conflict in the Middle East, despite the U.S. military beginning the implementation of a blockade on Iranian ports.

The dollar index, which measures the performance of the American currency against a basket of six major currencies, fell by 0.28% to 98.061, to trade near its weakest levels since March 2, which was the first trading day after the outbreak of the war between the United States, Israel, and Iran.

If this trend continues, this will be the longest daily losing streak for the index since December, when investors were betting on a year witnessing a cut in U.S. interest rates and general weakness in the global reserve currency.

Five sources reported on Tuesday that negotiating teams from the United States and Iran may return to Islamabad later this week, after the highest level of talks between the two countries in decades ended during the weekend without achieving a breakthrough.

U.S. President Donald Trump said that Iran reached out on Monday and expressed its desire to reach an agreement, but he stressed that he would not agree to any deal that allows Tehran to possess a nuclear weapon.

Blockade increases Strait of Hormuz disruptions

At the same time, the blockade imposed by the U.S. military on Iranian ports sparked anger in Tehran and increased uncertainty regarding the reopening of the Strait of Hormuz, which is a vital corridor for shipping a large percentage of the world's oil and gas.

The closure of the Strait led to a rise in dollar-denominated oil prices, which had a supporting effect on the movements of the American currency.

Nick Rees, head of macroeconomic research at Monex Europe, said that the risk factor remains the main driver for markets, explaining that markets have become, on one hand, less responsive to economic data that previously moved them strongly, and on the other hand, more sensitive to rumors and developments coming from the Middle East, especially regarding the possibility of reaching a solution or the continuation of escalation.

The euro rose by 0.35% against the dollar to $1.1798, and the British pound also climbed by 0.46% to $1.3564, returning to its levels before the outbreak of the war.

Elsewhere, the dollar declined by about 0.4% against the Japanese yen to 158.75 yen.

The yen remains vulnerable to selling pressure amid concerns of the deterioration of Japan's trade balance and the high probability of oil prices remaining at elevated levels, according to Keiichi Iguchi, senior strategist at Resona Holdings.

The probability of the Bank of Japan raising interest rates this month has also declined, after having been considered strong previously, as the war increased market volatility and negatively affected the clarity of economic forecasts.

Ray Attrill, head of currency strategy at National Australia Bank, said that the Bank of Japan remaining unchanged in its position at the end of April could push the dollar-yen exchange rate to exceed the 160 yen level, a level viewed in markets as a red line that may call for government intervention in the currency market.

Gold prices rose by more than 1% in European markets on Tuesday, on their way toward recording the highest level in several weeks, supported by the broad decline in U.S. dollar levels in the foreign exchange market, which comes after a breakthrough in negotiations between the United States and Iran, despite the naval blockade that the U.S. Navy began implementing on the Strait of Hormuz and Iranian ports.

With the current slowdown in global oil prices, concerns of accelerating global inflation are receding, reducing pressure on the Federal Reserve to raise interest rates in the near term.

Price overview

• Gold prices today: Gold metal prices rose by 1.2% to ($4,796.42), from the opening level of trading at ($4,741.03), and recorded a low of ($4,741.03).

• Upon price settlement on Monday, gold prices lost 0.2%, in the second consecutive daily loss, due to correction and profit-taking operations from a three-week high at $4,857.56 per ounce.

The U.S. Dollar

The dollar index fell on Tuesday by 0.25%, deepening its losses for the seventh consecutive session and recording a six-week low, reflecting the continued drop in the levels of the American currency against a basket of global currencies.

As we know, the drop in the levels of the American currency makes gold bullion priced in U.S. dollars more attractive to buyers holding other currencies.

This drop comes amid improved risk sentiment in the markets after media reports confirmed the continuation of negotiations between the United States and Iran regarding reaching a lasting peace agreement in the Middle East.

Diplomatic efforts

Diplomatic efforts continue, sponsored by Pakistan and Turkey, to bring viewpoints closer between the United States and Iran and to push toward engaging in a new round of negotiations, following the stumbling of the previous round held in the Pakistani capital, Islamabad, on Friday.

Media reports confirmed that a new round of negotiations between Washington and Tehran may be held in Islamabad next Thursday, with the Swiss capital, Geneva, proposed as a potential alternative for the second round of U.S.-Iranian negotiations.

Keiichi Iguchi, senior strategist at Resona Holdings, said: The series of statements has created some relief in the markets, as it renewed the possibility of reaching a diplomatic solution.

Global oil prices

Global oil prices fell by an average of 1%, with signs appearing that Washington and Tehran may revive peace talks after the United States began a blockade of the Strait of Hormuz.

U.S. interest rates

• After the decline in oil prices and according to the "FedWatch" tool of the CME Group: pricing of the probability of keeping U.S. interest rates unchanged at the April meeting rose from 96% to 99%, and pricing of the probability of raising interest rates by about 25 basis points fell from 4% to 1%.

• In order to re-price those probabilities, investors are closely following the release of more economic data from the United States.

Gold performance expectations

Phillip Streible, chief market analyst at Blue Line Futures, said: The market is heavily influenced by news. Eyes are on the price of crude oil because it will directly affect inflation, and this in turn will affect Federal Reserve policy.

SPDR Fund

Gold holdings at the SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, decreased on Monday by about 5.23 metric tons, bringing the total down to 1,047.19 metric tons, which is the lowest level since March 30. 

The euro rose in European markets on Tuesday against a basket of global currencies, extending its gains for the seventh consecutive day against the U.S. dollar, recording its highest level in six weeks, benefiting from the drop in the levels of the American currency after a breakthrough in negotiations between the United States and Iran, despite the naval blockade that the U.S. Navy began implementing on the Strait of Hormuz and Iranian ports.

With inflation in the eurozone exceeding the European Central Bank's medium-term target due to high energy prices, the probability of raising European interest rates at least once this year has increased, pending the release of more crucial economic data in Europe.

Price overview

• Euro exchange rate today: The euro rose against the dollar by more than 0.1% to ($1.1770), the highest since March 2, from today's opening price of ($1.1758), and recorded a high of ($1.1753).

• The euro ended Monday's trading up by 0.3% against the dollar, in its sixth consecutive daily gain, within the longest streak of daily gains this year, thanks to hopes of the continued war truce between the United States and Iran.

The U.S. Dollar

The dollar index fell on Tuesday by 0.1%, deepening its losses for the seventh consecutive session and recording a six-week low, reflecting the continued drop in the levels of the American currency against a basket of global currencies.

This drop comes amid improved risk sentiment in the markets after media reports confirmed the continuation of negotiations between the United States and Iran regarding reaching a lasting peace agreement in the Middle East.

Diplomatic efforts

Diplomatic efforts continue, sponsored by Pakistan and Turkey, to bring viewpoints closer between the United States and Iran and to push toward engaging in a new round of negotiations, following the stumbling of the previous round held in the Pakistani capital, Islamabad, on Friday.

Media reports confirmed that a new round of negotiations between Washington and Tehran may be held in Islamabad next Thursday, with the Swiss capital, Geneva, proposed as a potential alternative for the second round of U.S.-Iranian negotiations.

Keiichi Iguchi, senior strategist at Resona Holdings, said: The series of statements has created some relief in the markets, as it renewed the possibility of reaching a diplomatic solution.

Global oil prices

Global oil prices fell by an average of 1%, with signs appearing that Washington and Tehran may revive peace talks after the United States began a blockade of the Strait of Hormuz.

Undoubtedly, the decline in global oil prices reduces fears of accelerating inflation, which lessens the pressure on global central banks, especially the European Central Bank and the Bank of England, to raise interest rates in the near term.

European interest rates

• Lagarde, President of the European Central Bank, said: The bank is ready to raise interest rates even if the expected rise in inflation is short-term.

• The money market pricing of the probabilities of the European Central Bank raising European interest rates by about 25 basis points in April is currently stable around 35%.

• Sources reported to Reuters that the European Central Bank is likely to begin discussing raising interest rates during the meeting of this month.

• In order to re-price the above probabilities, investors await the release of more economic data in the eurozone regarding the levels of inflation, unemployment, and wages.

The Japanese yen rose in Asian trading on Monday against a basket of major and minor currencies, on its way toward achieving its first gain in the last four days against the U.S. dollar, benefiting from the drop in the levels of the American currency after a breakthrough in negotiations between the United States and Iran, despite the naval blockade that the U.S. Navy began implementing on the Strait of Hormuz and Iranian ports.

With the current decline in global oil prices, indications are increasing that inflationary pressures on monetary policy makers at the Bank of Japan are receding, which reduces the likelihood of raising Japanese interest rates later this month.

Price overview

• Japanese yen exchange rate today: The dollar fell against the yen by 0.2% to (159.08¥), from today's opening price of (159.42¥), and recorded a high of (159.44¥).

• The yen ended Monday's trading down by 0.1% against the dollar, in its third consecutive daily loss, amid market assessment of the collapse of talks in the first round between the United States and Iran in Pakistan.

The U.S. Dollar

The dollar index fell on Tuesday by about 0.1%, deepening its losses for the seventh consecutive session and recording a six-week low, reflecting the continued drop in the levels of the American currency against a basket of global currencies.

This drop comes amid improved risk sentiment in the markets after media reports confirmed the continuation of negotiations between the United States and Iran regarding reaching a lasting peace agreement in the Middle East.

Diplomatic efforts

Diplomatic efforts continue, sponsored by Pakistan and Turkey, to bring viewpoints closer between the United States and Iran and to push toward engaging in a new round of negotiations, following the stumbling of the previous round held in the Pakistani capital, Islamabad, on Friday.

Media reports confirmed that a new round of negotiations between Washington and Tehran may be held in Islamabad next Thursday, with the Swiss capital, Geneva, proposed as a potential alternative for the second round of U.S.-Iranian negotiations.

Global oil prices

Global oil prices fell by an average of 1%, with signs appearing that Washington and Tehran may revive peace talks after the United States began a blockade of the Strait of Hormuz.

Japanese interest rates

• The pricing of the probabilities of the Bank of Japan raising interest rates by a quarter of a percentage point in the April meeting is currently stable around 10%.

• In order to re-price those probabilities, investors await the release of more data on the levels of inflation, unemployment, and wages in Japan.