FOREX-Dollar holds near six-week high; mixed messages on US-Iran deal feed uncertainty

The dollar ​held near a six-week peak on Friday, after conflicting signals over ‌a U.S.-Iran ​peace deal whipped up volatility across financial markets, though investors latched on to hopes of some progress. Washington and Tehran stuck to opposing stances over the latter's uranium stockpile and control of the Strait of Hormuz, although U.S. Secretary of State Marco Rubio said there had been "some good signs" in talks. The ‌mixed messages whipsawed markets overnight, though currency moves were largely subdued in Asian trade on Friday as investors awaited more clarity.

The dollar was a touch higher and stood at 99.23 against a basket of currencies, not far from a peak of 99.515 hit in the previous session, its highest since April 7. The euro, which was headed for a second weekly loss, was down 0.1% on the day at $1.1607, while the pound ‌was slightly lower at $1.342, having shrugged off data earlier that showed retail sales dropped by the most in nearly a year in April, as consumers felt the pinch of the inflationary effects of the ‌Iran war. The dollar found additional support from U.S. data, which showed weekly jobless claims fell last week while manufacturing activity rose to a four-year high in May, underscoring resilience in the world's largest economy.

"We're coming to the end of week 12, we're six weeks in the ceasefire, and I'm just not really that convinced we're any closer to a resolution between the U.S. and Iran," Tony Sycamore, a market analyst at IG, said of the Middle East war. "I still feel like the risks are ⁠for the ​U.S. dollar to go higher, because I really just ⁠don't see a way out of this situation in the Middle East without them sort of needing to be more forceful."

ASIAN CURRENCIES UNDER PRESSURE The U.S. dollar's strength and persistently high oil prices have spelled pain for the yen, which on Friday struggled on ⁠the weaker side of 159 per dollar. It was 0.1% lower at 159.09 per dollar. The yen is teetering even after likely intervention from Tokyo just weeks ago to support it. It has given up nearly 75% of its gains ​from the presumed intervention, which has left traders on alert for further moves by Japanese authorities.

"It's just buying time, really. What they need is a change in fundamentals, and I ⁠think the best thing that could happen is a quick deal to end the Iran conflict," said Lee Hardman, a currency strategist at MUFG. "I don't think you'd see dollar/yen drop too sharply from here, but even if it just got back down into ⁠the ​mid 150s, taking some of the selling pressure off the yen, that would probably be the best they can hope for right now."

The Bank of Japan is only expected to raise borrowing costs gradually while other central banks, including the European Central Bank, are likely to deliver hikes far more quickly, which puts the yen at a disadvantage with investors who seek out extra returns from higher domestic interest ⁠rates. On a trade-weighted basis, the yen is at record lows, which favours its exporters but compounds the energy-price shock, given Japan's reliance on imported goods. Data on Friday showed Japan's core inflation slowed ⁠to a four-year low in April, complicating the outlook for ⁠BOJ policy. Currencies in emerging Asia have also come under immense pressure owing to the surge in global oil prices, forcing policymakers to take increasingly urgent and unusual steps to shore up their economies. Earlier this week, Indonesia announced all exporters of natural resources must store 100% of their export revenues in state-owned banks ‌from June 1, in a ‌move to support the plummeting rupiah.

The rupiah was pinned near a record low on Friday at 17,710 per ​dollar.

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