The U.S. dollar remained under pressure on Thursday as global investors cautiously embraced hopes of a diplomatic breakthrough in the Middle East, easing demand for traditional safe-haven assets and lifting risk-sensitive currencies across global markets.
Currency traders reacted to reports that Iran is reviewing a U.S.-backed peace proposal aimed at formally ending recent hostilities between Tehran and Washington. While details of the proposal remain unclear, market sentiment improved after indications that both sides may be willing to continue negotiations despite unresolved disputes surrounding Iran’s nuclear program and the strategic Strait of Hormuz.
The dollar index, which measures the greenback against a basket of major currencies, slipped back below recent highs as traders reduced defensive positions built during weeks of geopolitical tension. Analysts said hopes for de-escalation encouraged investors to move back into higher-yielding and commodity-linked currencies, including the euro and Australian dollar.
The euro strengthened toward recent multi-week highs, supported by falling energy concerns after oil prices retreated sharply in the previous trading session. European economies are particularly sensitive to oil supply disruptions because of their dependence on imported energy, making any sign of stability in the Gulf region positive for the single currency.
The Japanese yen also gained ground after renewed verbal intervention from Tokyo officials seeking to slow volatility in currency markets. Traders remained cautious following reports that Japanese authorities may have stepped into markets multiple times over the past week to support the yen against the dollar. Japan’s top currency officials reiterated that they were prepared to act against speculative trading if needed.
Oil markets, however, continued to signal uncertainty. Brent crude prices edged higher in Asian trading after suffering an almost 8% drop overnight on optimism surrounding possible peace talks. Analysts warned that markets could quickly reverse course if negotiations fail to guarantee the reopening of shipping routes through the Strait of Hormuz, a critical artery for global energy supplies.
Helima Croft, head of global commodity strategy at RBC Capital Markets, cautioned that any agreement lacking firm guarantees on oil exports and shipping access may only deliver temporary relief to markets. Investors remain concerned that disruptions in the region could reignite inflation pressures worldwide.
Global equities reacted positively to the improving sentiment. Asian shares climbed toward record highs, with strong gains in Japan, South Korea, and Taiwan driven by optimism over easing geopolitical risks and continued strength in technology earnings. Investors also welcomed signs that inflation fears may moderate if oil prices stabilize further.
Still, analysts stressed that markets remain highly sensitive to headlines from the Middle East. Any breakdown in diplomacy or renewed military escalation could quickly restore demand for the dollar and other safe-haven assets.
Despite the dollar’s latest weakness, many strategists believe the U.S. currency retains long-term support because of its dominant role in global trade and finance. However, recent swings highlight how geopolitical developments and energy markets are increasingly shaping investor behavior in currency trading.