US Dollar Weakens on Geopolitical Optimism

Broad market sentiment was driven by reports of progress toward a potential US-Iran peace deal, which improved risk appetite and weighed heavily on the safe-haven US Dollar. The dollar index (DXY) gave back its war-related gains, leading to strength in other currencies such as the New Zealand dollar, British pound, and Swiss franc. While some analysts believe the dollar’s recent decline may be overdone, optimism over easing Middle East tensions was the primary driver in foreign exchange markets.

Gold Rises Amid Shifting Market Drivers

Gold prices advanced to two-week highs, capitalizing on the widespread weakness in the US Dollar and a retreat in oil prices linked to geopolitical de-escalation hopes. This rally occurred despite headwinds from the Federal Reserve's anticipated "higher-for-longer" interest rate stance. Analysts noted that prior inflation concerns, exacerbated by the recent oil supply shock, continue to inform the Fed's tighter policy bias, creating conflicting pressures on the precious metal.

Oil Price Volatility and Inflation Concerns

The possibility of a US-Iran agreement has caused a pullback in oil prices, reducing immediate fears of a severe energy supply shock. However, analysts pointed out that significant supply disruptions from the conflict have already contributed to sustained inflation risks. This inflationary impact remains a key factor influencing the Federal Reserve’s restrictive policy outlook, even as crude prices ease on diplomatic developments.

Global Central Banks Pursue Divergent Policies

Central banks outside the US are demonstrating varied responses to the current economic environment. Norway's Norges Bank delivered a surprise interest rate hike to address persistent inflation, whereas the central banks of Poland and Sweden opted to keep their policy rates unchanged. Meanwhile, minutes showed that Chile's central bank had considered a rate hike in April, contrasting with expectations of a more dovish stance from the central bank of Mexico.