The US dollar rose on Tuesday as investors balanced cautious hopes for a Middle East peace agreement against concerns that the Federal Reserve may raise interest rates to contain inflation driven by higher energy prices.

US President Donald Trump said on Monday that there is now a “very good chance” of reaching an agreement to limit Iran’s nuclear program.

The dollar had surged in March after Iran’s effective closure of the Strait of Hormuz pushed oil prices sharply higher, hurting oil-dependent economies such as Japan and the eurozone while boosting demand for the US currency as a safe haven.

However, oil prices fell by 2% on Tuesday following Trump’s remarks.

Paul Mackel, Global Head of FX Research at HSBC, said: “There are reasons why the dollar has not returned to the levels seen in March.”

He added: “The main reasons are that global risk appetite has recovered strongly, stress in US dollar overnight indexed swap (OIS) markets has not reached levels consistent with pricing a strong Fed tightening cycle, and monthly global growth momentum remains positive.”

At the same time, investors are now pricing in a roughly 48.5% probability of a Federal Reserve rate hike in December, alongside a 98.8% probability of rates remaining unchanged at the next June meeting, according to the CME FedWatch Tool.

Thierry Wizman, Global FX and Rates Strategist at Macquarie Group, said: “Even if the Federal Reserve moves to signal a neutral stance in June, that may not be enough to stabilize inflation expectations and long-term US Treasury yields.”

He added: “There will be an opportunity for the Fed to shift its rhetoric more clearly toward monetary tightening through the upcoming series of speeches by central bank officials between now and June 6.”

Major Currency Performance

The US dollar index, which measures the currency against a basket of six major currencies, rose by 0.2% to 99.18 points after ending a five-day winning streak on Monday as fears of escalating war eased.

The euro fell by 0.2% to $1.1633.

Japanese Yen Nears Intervention Zone

Against the Japanese yen, the US dollar rose by 0.15% to 159.10 yen after government data on Tuesday showed Japan’s economy expanded at an annualized pace of 2.1% in the first quarter, strengthening expectations for a Bank of Japan rate hike in June.

Japanese Finance Minister Satsuki Katayama told reporters on Monday that Japan is prepared to act against excessive foreign exchange volatility, stressing that any intervention to support the yen and sell dollars would be conducted in a way that does not push US Treasury yields higher.

Investors are watching closely for further signs of intervention to support the yen, which remains slightly stronger than levels seen before Japanese authorities carried out their first direct market intervention in nearly two years last month.

Other Currencies

The Australian dollar fell by 0.5% to $0.71345 following the release of minutes from the Reserve Bank of Australia’s May 5 meeting.

The New Zealand dollar also declined by 0.4% to $0.5854, pressured by movements in the Australian currency.

Against the Chinese yuan, the US dollar rose by 0.1% to 6.8031 yuan in offshore trading.

Gold prices fell in the European market on Tuesday, resuming losses that paused temporarily yesterday, and moving closer once again to two-month lows, pressured by renewed strength in the US dollar toward multi-week highs against a basket of global currencies, amid escalating geopolitical tensions in the Middle East and rising fears of a renewed Iran war.

As inflationary pressures continue to build on Federal Reserve policymakers, expectations for at least one US interest rate hike this year have increased, while investors await the release of the minutes from the latest Federal Reserve policy meeting on Wednesday.

Price Overview

• Gold prices today: Gold prices fell by around 0.8% to $4,531.19 per ounce, from the opening level at $4,566.56, while recording an intraday high at $4,589.42.

• At Monday’s settlement, gold prices gained around 0.6%, marking the first gain in five sessions, after hitting a near two-month low earlier in the day at $4,480.43 per ounce.

US Dollar

The dollar index rose by more than 0.3% on Tuesday, resuming gains that paused temporarily yesterday and approaching a fresh six-week high, reflecting renewed strength in the US currency against a basket of major and secondary currencies.

The dollar continues to benefit from safe-haven demand, as market sentiment remains fragile despite US President Donald Trump’s decision to postpone a military strike on Iran following Gulf mediation efforts, while markets wait for signs of tangible progress in Pakistan-backed peace negotiations.

Developments in the Iran War

• Trump stated on Truth Social that he agreed to delay the military strike scheduled for Tuesday after intensive talks with Gulf leaders in order to give the Pakistani mediation additional time.

• Trump instructed the Pentagon to remain on full alert and prepared to move militarily “from every direction” if negotiations fail.

• The White House confirmed that any final agreement must include a strict and absolute ban on Iran obtaining a nuclear weapon.

• Tehran officially submitted an updated 14-point response to the US administration through the Pakistani mediator. Iran is demanding a long-term ceasefire, international guarantees, and the lifting of the naval blockade.

• US officials described the new Iranian proposal as “insufficient and lacking meaningful improvement,” although Trump later described the negotiations as showing “very positive progress” following the postponement decision.

• The United States is demanding a 20-year freeze on Iran’s nuclear program, while Tehran continues to reject the proposal.

US Interest Rates

• Kevin Warsh will be sworn in as Chairman of the Federal Reserve on Friday.

• According to the CME FedWatch Tool, markets are currently pricing in a 45% probability of a Federal Reserve rate hike in December, compared with just above 16% at the beginning of May.

• Markets are also pricing a 99% probability that US interest rates will remain unchanged at the June meeting, while the probability of a 25 basis point rate cut stands at just 1%.

• To reprice those expectations, investors continue to closely monitor incoming US economic data, in addition to the minutes of the latest Federal Reserve meeting due on Wednesday.

Expectations for Gold Performance

Financial markets strategist Ilya Spivak said, referring to the April Federal Reserve meeting minutes: “The dominant theme in markets today is that conditions are calming after Friday’s events, and markets are attempting to determine their next direction while waiting for midweek event risks.”

SPDR Fund

Gold holdings in SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, increased by 1.43 metric tons on Monday, bringing total holdings to 1,038.85 metric tons.

The British pound fell in European trading on Tuesday against a basket of global currencies, resuming losses that paused temporarily yesterday during a recovery attempt from a six-week low against the US dollar, amid ongoing political tensions in the United Kingdom.

Demand for the US dollar as a safe-haven asset also returned as investor sentiment remained fragile while markets continued monitoring developments in the Iran war, particularly after President Donald Trump delayed a military strike on Iran following mediation efforts led by major Gulf leaders.

The International Monetary Fund said the Bank of England does not need to raise interest rates and may instead need to cut them. Investors are now awaiting important UK labor market data later today to reassess expectations surrounding British interest rates.

Price overview

• British pound exchange rate today: The pound fell around 0.2% against the dollar to $1.3409, from today’s opening level of $1.3432, while recording a session high of $1.3438.

• On Monday, the pound gained 0.85% against the dollar, marking its first gain in six sessions after earlier touching a six-week low of $1.3303.

Political tensions

The British political scene is moving toward a critical phase of instability, as Prime Minister Keir Starmer faces mounting pressure to resign following the resignation of Health Secretary Wes Streeting and several government officials after the ruling Labour Party suffered a heavy defeat in local elections amid strong gains for Reform UK, right-wing parties, and the Greens.

While Starmer remains determined to stay in office and warns of political chaos in the country, internal efforts are intensifying to support Greater Manchester Mayor Andy Burnham as a potential future leader of the Labour Party.

Potential future British prime minister Andy Burnham confirmed on Monday that if he takes office, he would not change the current fiscal rules designed to ensure the sustainability of the country’s debt.

These escalating political developments come as London adopts a cautious diplomatic approach externally, focused on protecting international shipping in the Strait of Hormuz through a multinational defensive mission while avoiding direct involvement in military conflict against Iran.

US dollar

The US Dollar Index rose 0.15% on Tuesday, resuming gains that paused temporarily yesterday and moving back toward a six-week high, reflecting renewed strength in the US currency against a basket of global currencies.

The dollar gained support from safe-haven demand, as market sentiment remains fragile despite President Donald Trump’s decision to delay a military strike on Iran following Gulf mediation efforts, while awaiting tangible progress in peace talks being conducted under Pakistani sponsorship.

Latest developments in the Iran war

• Trump stated on the Truth Social platform that he agreed to postpone the planned Tuesday attack on Iran following intensive contacts with Gulf leaders in order to grant the Pakistani mediation additional time.

• Trump instructed the Department of Defense (Pentagon) to remain on full alert and prepared to proceed with military action “from every direction” if negotiations fail.

• The White House insists that any final agreement must include a strict and fundamental condition preventing Iran entirely from obtaining a nuclear weapon.

• Tehran officially submitted an updated 14-point response to the US administration through the Pakistani mediator. Iran is demanding a long-term truce, international guarantees, and the lifting of the naval blockade.

• US officials said the new Iranian proposal is “insufficient and does not include meaningful improvements,” although Trump later described the ongoing negotiations as showing “very positive progress” following the decision to delay the strike.

• The United States is demanding a 20-year freeze on Iran’s nuclear program, while Tehran continues to reject the proposal.

British interest rates

• The International Monetary Fund said on Monday that the Bank of England does not need to raise interest rates and may instead need to lower them.

• Markets are currently pricing the probability of a Bank of England rate hike at the June meeting at around 45%.

UK labor market

To reassess the above expectations, investors are awaiting key UK labor market data later today, including April unemployment benefit claims, along with March unemployment and average wage figures.

Outlook for the British pound

At Economies.com, we expect that if UK labor market data comes in less aggressive than markets currently anticipate, expectations for a British interest rate hike in April will decline, placing further negative pressure on the pound sterling.

The Japanese yen fell in Asian trading on Tuesday against a basket of major and minor currencies, extending its losses for a seventh consecutive session against the US dollar and approaching its lowest level in three weeks, as investors assessed the latest developments surrounding the Iran war, particularly after Trump delayed a military strike on Iran following mediation efforts by major Gulf leaders.

Government data released in Tokyo today showed that Japan’s economy grew better than expected in the first quarter of this year, strengthening expectations that the Bank of Japan could raise interest rates when it meets in June.

Price overview

• Japanese yen exchange rate today: The dollar rose against the yen by 0.15% to ¥159.03, from today’s opening level of ¥158.79, while recording a session low of ¥158.71.

• The yen ended Monday trading down by less than 0.1% against the dollar, marking its sixth consecutive daily loss, and touched a three-week low of ¥159.08 amid fears of renewed conflict with Iran.

US dollar

The US Dollar Index rose 0.15% on Tuesday, resuming gains that paused temporarily yesterday and moving back toward a six-week high, reflecting renewed strength in the US currency against a basket of global currencies.

The dollar gained support from safe-haven demand, as market sentiment remains fragile despite President Donald Trump’s decision to delay a military strike on Iran following Gulf mediation efforts, while awaiting tangible progress in peace talks being conducted under Pakistani sponsorship.

Latest developments in the Iran war

• Trump stated on the Truth Social platform that he agreed to postpone the planned Tuesday attack on Iran following intensive contacts with Gulf leaders in order to grant the Pakistani mediation additional time.

• Trump instructed the Department of Defense (Pentagon) to remain on full alert and prepared to proceed with military action “from every direction” if negotiations fail.

• The White House insists that any final agreement must include a strict and fundamental condition preventing Iran entirely from obtaining a nuclear weapon.

• Tehran officially submitted an updated 14-point response to the US administration through the Pakistani mediator. Iran is demanding a long-term truce, international guarantees, and the lifting of the naval blockade.

• US officials said the new Iranian proposal is “insufficient and does not include meaningful improvements,” although Trump later described the ongoing negotiations as showing “very positive progress” following the decision to delay the strike.

• The United States is demanding a 20-year freeze on Iran’s nuclear program, while Tehran continues to reject the proposal.

New warnings

Japanese Finance Minister Satsuki Katayama told reporters on Monday that Japan remains ready to act against excessive volatility in the foreign exchange market at any time, while ensuring that any intervention to support the yen through dollar selling does not lead to higher US Treasury yields.

Japanese economy

Data released today in Tokyo showed that Japan’s economy expanded at an annualized rate of 2.3% in the first quarter of this year, beating market expectations for 1.7% growth, after the world’s fourth-largest economy recorded growth of 1.3% in the fourth quarter of last year.

Japanese interest rates

• Following the above data, markets increased pricing for the probability of a quarter-point interest rate hike by the Bank of Japan at its June meeting from 80% to 85%.

• Investors are awaiting additional data on inflation, unemployment, and wage growth in Japan to reassess those expectations further.