Dollar Index Reverses Gains as Middle East Tensions Ease

The US Dollar Index declined on Monday after earlier reaching a two-month peak. An agreement between Iran and Israel to pause hostilities has alleviated market fears of a breakdown in peace negotiations, causing both oil prices and bond yields to retreat from their intraday highs.

The Bloomberg Dollar Spot Index fell less than 0.1%, having briefly touched its highest level since April 7th. The yield on the US two-year Treasury note rose by 1 basis point, while the 10-year yield increased by approximately 3 basis points.

WTI crude oil pared its gains to less than 1%, following indications from Israel and Iran that they would avoid further escalation after a day of hostile actions.

The one-year risk reversal for the Dollar Index briefly surged above 60 basis points, with the price of call options exceeding that of put options for the first time since March 2025. This indicator has been on a steady climb since mid-April.

Strategists at Standard Chartered, Steve Englander and Nicholas Chia, noted in a report that the market's negative reaction to Friday's strong employment data appears to have been mistaken.

They suggested that the strengthening labor market is unlikely to fuel inflation, as it stems from productivity improvements.

G10 currencies showed mixed performance against the dollar. The Norwegian Krone and Swiss Franc underperformed, while the New Zealand Dollar and Swedish Krona led the gains.

The USD/JPY pair initially rose 0.1% to 160.39, marking its highest level since April 30th, before giving up those gains to trade approximately 0.1% lower at 160.13.

The year-to-date high of 160.72 remains a key short-term resistance level for the currency pair. A breach of this level could potentially trigger dollar-selling intervention by Japanese authorities.

The EUR/USD pair advanced 0.1% to 1.1532, marking its second gain in three days.

Economists have cautioned that the European Central Bank, which is intent on preserving its inflation-fighting credibility, faces the risk of making a costly policy error at its meeting this week.

The USD/CAD pair rose for a fourth consecutive day, trading at 1.3952. It reached an intraday high of 1.3961, coming within close reach of the 2026 high of 1.3967.