The dollar stabilised in early trading on Friday, following a decline to its lowest level in a week as traders analysed reports suggesting that a ceasefire agreement in the Middle East might be forthcoming. Against the yen, the U.S. currency appreciated by 0.1%, reaching a value of 160.07 yen. The Australian dollar experienced a decline of 0.1%, settling at $0.7045, while the New Zealand dollar also saw a decrease of 0.1%, trading at $0.5830. The euro last traded at $1.1576, maintaining proximity to its highest level in a week following the European Central Bank’s initial interest rate increase in three years on Thursday. The British pound remained unchanged at $1.3414. “Markets reversed late in the U.S. session after President Trump cancelled planned attacks on Iran, suggesting a ​deal could be signed as soon as this weekend,” analysts noted in a communication to clients.

“The USD weakened on the latest developments, with the DXY lower and the AUD rising ​against the USD and other major currencies.” Brent crude experienced a decline of 1.6%, settling at $88.94 a barrel as trading resumed in Asia. This movement followed President Donald Trump’s announcement on Thursday regarding the potential for a peace deal between the United States and Iran, which could be signed as early as this weekend, thereby reopening the Strait of Hormuz to shipping. Iran asserted that it had not arrived at a conclusive decision regarding the agreement. Data released on Thursday indicated that U.S. producer prices rose more than anticipated in May, resulting in the most significant annual increase in three and a half years, attributed to the escalation of the Middle East conflict which has heightened energy product costs.

“However, traders discovered optimism in the specifics of the report. The more important core PPI reading, which typically feeds directly into core PCE inflation, came in at 4.9% year-on-year, well below the 5.4% expected,” said Tony Sycamore referring to the Federal Reserve’s preferred gauge of cost-of-living increases. “This, combined with the fall in energy prices, helped calm inflationary concerns.” Expectations regarding the timing of the Fed’s next rate hike have been adjusted to December following the report. Fed funds futures currently reflect an implied probability of 63.3% for a 25-basis-point increase at the U.S. central bank’s two-day meeting concluding on October 28, in contrast to an equal likelihood noted just a day prior, as reported by the CME Group’s FedWatch tool.

The European Central Bank is now widely anticipated to raise interest rates once more in September, as indicated by LSEG data. “The ECB delivered its first 25-basis-points hike since September 2023, with inflation and growth revisions hawkish at the margin,” analysts wrote in a research note. “That said, it offered little guidance on if and when ​it will follow with more, though risks seemed skewed towards further action, barring a quick improvement in the inflation outlook.”