Dollar gains amid Middle East uncertainty, Wall Street extends rally on strong earnings

Iran denies negotiations with the US

The US dollar rebounded against all but one of its major peers on Monday, finishing the day nearly unchanged only against JPY. Today, it is staging a recovery against the yen as well.

It seems that after last week’s drop in the US dollar amid a less-hawkish-than-expected Fed and the intervention in dollar/yen by Japanese authorities, some participants may have decided to cover some of their short positions.

The conflicting messages from the Middle East may have also prompted some dollar buying. Over the weekend, US President Trump said that negotiations with Iran about reopening the Strait of Hormuz could begin immediately, followed by talks on Iran’s nuclear program, signaling a de-escalation in recent hostilities.

However, Iran denied that the two nations agreed on a new round of negotiations. A foreign ministry spokesperson noted that they are only working with Oman on how to manage traffic through the Strait of Hormuz.

Oil prices moved slightly higher today, but not enough to suggest that investors became extremely concerned again about inflation spiraling out of control. Indeed, Fed funds futures are still pointing to approximately a 65% chance of a rate hike in September, with the move being nearly fully priced in for October.

Besides headlines surrounding the US-Iran saga, dollar traders are also likely to pay extra attention to Friday’s US jobs data. Should Nonfarm payrolls increase by more than expected and wage growth accelerate, the likelihood of a September hike may rise, thereby allowing the greenback to further recover.

Is another yen intervention looming?

After last week’s massive rally amid coordinated intervention efforts by Japan and the US, the yen is on the back foot again, with dollar/yen rebounding around 1.6% from its Monday lows.

That said, even if there is further recovery in dollar/yen today, it could remain limited and short-lived. Japan and the US remain willing and will “certainly” proceed with more action if the yen shows signs of resuming its downtrend, a former BoJ official noted today.

Nonetheless, there are still questions on how low dollar/yen could go. Could it fall below the 155.00 mark, even if a September Fed hike becomes more likely? And even if the BoJ cannot turn more hawkish from here?

A BoJ hike is more than fully priced in for December, with the probability of it happening in October receiving an 80% chance. What’s more, there are 85bps worth of rate increases being priced in by the end of 2027. Thus, with PM Takaichi more likely to tilt the scales towards the dovish side through her future appointments, the bar for further raising the implied path may be very high.

Robust earnings push stocks higher; Dow hits record close

On Wall Street, all three of the main indices gained ground, with the tech-heavy Nasdaq rising more than 2% and the Dow Jones achieving a new record closing. Sentiment improved after President Trump canceled a planned powerful attack on Iran and said that negotiations are resuming.

The earnings season is also fueling the latest rebound, as investors cheered robust results by Microsoft and Amazon, with the former recording its biggest daily gain in history last Thursday, and the latter surging around 15% on Friday. Palantir also surged yesterday after the AI software company topped earnings estimates and said that commercial revenue more than doubled from a year ago.

Today, it will be the turn of Space X and chipmaker giant AMD to report earnings after the closing bell.