The US Dollar (USD) opened Monday with a gap lower, slipping from around 99.30—last week’s range low—to 99.00. The move came as expectations of a US–Iran peace deal and a possible reopening of the Strait of Hormuz reduced demand for the safe-haven currency, even as the pair held above prior highs. Donald Trump’s remarks that an agreement with Tehran is close lifted risk appetite, though he also said negotiators should “not to rush into a deal” and that the US would maintain its blockade of the Strait of Hormuz until an accord is signed. Separately, Secretary of State Marco Rubio said there is a “fairly strong proposal at the table” to reopen Hormuz and that diplomacy will be pursued before other options.
With US markets shut for the Memorial Day bank holiday, Monday’s calendar was empty, while attention turns to the Personal Consumption Expenditures (PCE) Price Index on Thursday. Recent data has supported the view that the US economy is resilient, and that—alongside fast-rising prices—has increased scrutiny on the Federal Reserve (Fed) policy path. Market pricing has shifted from expecting further tightening before the February 28 attack on Iran to implying a more than 50% chance of a rate hike this year, according to CME Group’s Fed Watch Tool, a dynamic that could limit further USD declines.
Geopolitical Developments and Oil Flows Impacting Dollar Sentiment
We are seeing the US Dollar soften at the start of the week, reacting to renewed diplomatic talks between Washington and Tehran. This optimism is easing concerns over the Strait of Hormuz, through which roughly 20% of the world’s total oil supply passes. Consequently, a slight dip in crude oil prices to the mid-$80s per barrel is reducing demand for the safe-haven dollar.
Positive comments from the State Department about a “constructive framework” are fueling this risk-on sentiment for now. However, we remain cautious as similar diplomatic pushes in 2024 and 2025 ultimately stalled, reminding us how quickly sentiment can reverse. This underlying uncertainty suggests any dollar weakness might be temporary.
PCE Data and the Fed’s Shifting Rate Outlook
Domestically, our focus is shifting towards this week’s Personal Consumption Expenditures (PCE) data for April. With the latest core PCE figures from March holding stubbornly at 2.8%, well above the Fed’s target, a hot reading could pressure the central bank. This persistent inflation is why the market is building expectations for a more hawkish Fed stance.
The CME FedWatch Tool now shows the market is pricing in a nearly 40% chance of a rate hike by the end of the year, a dramatic shift from the rate-cut expectations seen earlier in 2026. This hawkish repricing provides a strong floor for the dollar, suggesting traders should consider selling out-of-the-money puts on the USD. It implies that while geopolitical news can cause short-term dips, the underlying monetary policy trend should limit significant downside.
