FOREX:Dollar steady as markets await progress on Middle East peace talks

LONDON — The U.S. dollar held steady on Monday following a small weekly loss. Investors are closely watching developments in Middle East peace talks and awaiting crucial U.S. jobs data later this week, both of which could heavily influence the Federal Reserve's monetary policy path.

The dollar index, which measures the greenback against six major peer currencies, edged lower last week. This drop was driven by expectations that a deal between the United States and Iran to reopen the Strait of Hormuz was close. The closure of this critical oil artery has driven up energy prices and worsened the global inflation outlook, leading some analysts to expect the Fed to raise interest rates this year.

However, with little fresh insight into the progress of peace talks and a weekend flare-up of hostilities between the U.S. and Iran, currency markets have entered a wait-and-see mode.

"We're waiting to see some progress in one direction or another," said Tommy von Brömsen, FX strategist at Handelsbanken.

Should the Strait of Hormuz reopen to traffic and oil prices decline, the dollar would likely weaken in the near term. Consequently, risk-sensitive currencies, such as the Swedish crown, would outperform, von Brömsen added.

The dollar initially rallied at the onset of the conflict, buoyed by safe-haven demand and the U.S. economy’s relatively limited exposure to energy-driven inflation. However, it has since given back some of those gains due to uncertainty surrounding the conflict's trajectory.

Market Snapshot

The Dollar Index (=USD): Little changed on the day at 99.02, following last week's 0.4% drop.

The Euro (EUR=): Down slightly at $1.1652.

Sterling (GBP=): Edged up 0.1% to $1.3460.

The Australian Dollar (AUD=): Traded flat at $0.7179.

The New Zealand Dollar (NZD=): Slid 0.4% to $0.5969.

Fed Watch: Labor Data and Central Bank Independence

Given rising energy prices, their subsequent impact on inflation, and a resilient job market, investors are betting that the Fed's next move will be to raise its key interest rate. This marks a sharp contrast to pre-war expectations, which favored a rate cut.

Upcoming U.S. labor market figures, scheduled for release on June 5, could help determine the Fed's near-term strategy. According to a Reuters poll of economists, the data is expected to show a steady unemployment rate of 4.3% and a jobs increase of 85,000.

Meanwhile, Fed Governor Jerome Powell—whose term as chair formally ended on May 15—warned in a speech on Sunday about the politicization of monetary policy. Powell has decided to continue serving as a Fed governor, noting that he views current events as ongoing threats to the central bank's independence.

Other Fed policymakers, including Beth Hammack, Lorie Logan, and Mary Daly, are also scheduled to speak later this week.

Yen in Focus Ahead of BOJ Speech

A Wednesday speech by Bank of Japan (BOJ) Governor Kazuo Ueda is highly anticipated for signals on whether the central bank will proceed with a rate increase next week.

While there is no clear consensus within the BOJ yet, two sources familiar with the deliberations noted that a pause in the central bank's taper of government bond purchases is increasingly viewed as the preferred option.

The yen (JPY=) weakened 0.1% to 159.45 per dollar, creeping back toward the psychologically critical 160 level. This line previously triggered direct intervention by Japanese authorities to strengthen the currency.

"It seems like 160 is where they draw the line," said von Brömsen. "I think there will be intervention if we approach that level again." -Reporting by Samuel Indyk and Rocky Swift; Editing by Clarence Fernandez and Shri Navaratnam/Reuters