Dollar Swings Amid Uncertainty Over Iran Nuclear Deal

Dollar Swings as Traders React to Conflicting Iran Deal Reports

The dollar index was flat on Thursday as traders weighed the likelihood of a near-term deal to end the Middle East war, having earlier touched a six-week high on doubts a breakthrough was close. The greenback had climbed after a Reuters report that Iran's Supreme Leader issued a directive barring the export of the country's near-weapons-grade uranium.

However, the dollar surrendered those gains on unconfirmed reports that Washington and Tehran have agreed on a final draft of an agreement to end the war. President Donald Trump said the U.S. will eventually recover Iran's stockpile of highly enriched uranium, which Washington believes is destined for a nuclear weapon, though Tehran says it is intended purely for peaceful purposes.

Prolonged energy disruptions as the war drags on threaten to feed through to core U.S. consumer prices and inflation expectations, potentially pushing the Federal Reserve toward rate hikes. This has boosted the dollar, which is correlated to Treasury yields and also benefits from a safe-haven bid.

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A stronger U.S. growth outlook is adding further weight to the case for tightening and boosting the greenback, even as other economies around the world face a weaker trajectory and greater exposure to elevated energy costs. Weak PMIs in Europe, the UK, and Japan on Thursday underscored this unease, boosting the dollar on the back of its comparatively stronger outlook.

Economic activity in the euro zone shrank at its sharpest rate in more than 2-1/2 years in May, as a war-driven surge in living costs hammered demand for services and firms accelerated layoffs. Even so, rate hikes likely lie ahead, said Andrew Kenningham, chief Europe economist at Capital Economics.

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In the U.S., data showed that the number of Americans filing claims for unemployment benefits fell last week, pointing to labor market resilience and giving the Federal Reserve room to focus on rising inflation. The dollar's recent rise has pushed the yen back toward the 160 level that prompted Japan's first currency market intervention in nearly two years last month.

The Bank of Japan should raise interest rates at an "appropriate pace" as price pressures from the Middle East war may push underlying inflation above its 2% target, board member Junko Koeda said, bolstering the case for a rate hike as soon as June.