FOREX: Dollar wobbles as markets cling to hopes for Middle East peace deal

The dollar nursed losses on Tuesday on rising investor optimism of a deal being struck to reopen the crucial Strait of Hormuz and end the three-month-long Iran war, although fresh U.S. attacks on Iranian targets weighed on sentiment.

Despite low odds of an imminent deal, hopes of peace have pushed oil below $100 a barrel, eased pressure on emerging-market currencies, and boosted risk sentiment.

Iran's top negotiator and its foreign minister were in Doha for talks with Qatar's prime minister on a potential deal. U.S. President Donald Trump said talks with Iran were going "nicely", but warned of fresh attacks if they failed.

The U.S. Central Command said in a statement it had carried out fresh strikes designed "to protect our troops from threats posed by Iranian forces."

The euro EUR= held onto its gains to trade at $1.16365 on Tuesday, while the Japanese yen JPY= fetched 158.95 per U.S. dollar. U.S. markets were closed on Monday for a holiday. Against a basket of currencies, the dollar =USD was at 99.031.

"Markets are right to price some optimism because even a path toward reopening Hormuz lowers the extreme tail risk around oil, inflation and global growth," said Charu Chanana, chief investment strategist at Saxo in Singapore.

"I would not confuse positive negotiation noise with a durable de-escalation yet, the real test is not the headline deal, but whether tankers can move freely, insurance premiums can fall, and energy flows can normalize," Chanana added.

"Until then, this is likely to remain a stop-start risk-on trade."

The Australian dollar AUD=, often viewed as a proxy for risk, was steady at $0.71665, hovering near a one-week high after rising 0.65% on Monday.

The New Zealand dollar NZD= was at $0.58575, down 0.25% ahead of a policy decision from the country's central bank on Wednesday, where a Reuters poll shows 28 of 29 economists expect no change.

"With so much of the good news around a peace deal now likely priced into risk markets, there's certainly room for a 'buy the rumour, sell the fact' type reaction," said Tony Sycamore, market analyst at IG.

Oil prices clawed back some of their losses at the start of trading on Tuesday on news of the fresh U.S. strikes on Iranian targets. Brent crude futures LCOc1 rose 1.5% to $97.76 per barrel after dropping 7% on Monday. O/R

Analysts don't see energy prices returning to pre-war levels anytime soon, even with a near-term resolution, as supply chains will take time to normalise, keeping inflation and rate concerns firmly in place.

"We still expect a slow oil unwind, even if prices fall sustainably below $100 per barrel in the second half of 2026. This suggests the USD’s terms of trade support should not fade quickly," said OCBC strategists in a note.

"There is no strong case to be bearish USD," they said, citing resilient U.S. growth and AI-driven inflation pressures that have nudged Federal Reserve rhetoric in a more hawkish direction.

-Ankur Banerjee/Reuters