The global currency market started the new week on a cautious note as the U.S. dollar held broadly steady, with investors continuing to assess the outlook for negotiations between the United States and Iran. Although some positive diplomatic signals have emerged, talks aimed at easing tensions in the Middle East have yet to produce a clear breakthrough strong enough for markets to confidently reprice risk.

According to Reuters, the Dollar Index, which measures the greenback against six major peers, stood around 98.491 on Monday. The euro traded nearly flat at $1.1724, while sterling was at $1.3536. Meanwhile, the Japanese yen remained under pressure near the sensitive 160-per-dollar level, a threshold that could increase expectations of potential intervention by Japanese authorities.

U.S.–Iran Talks: Hope Remains, but Certainty Is Still Missing

The main focus for markets is now the progress of negotiations aimed at ending the prolonged conflict in the Middle East and reopening the Strait of Hormuz. Over the weekend, market sentiment came under pressure after U.S. President Donald Trump canceled a planned visit to Islamabad by his envoys, saying Iran could reach out if it wanted to negotiate an end to the war.

However, sentiment later improved after Axios reported, citing sources, that Iran had delivered a new proposal to the U.S. through Pakistani mediators. The proposal was said to focus on reopening the Strait of Hormuz and ending the war, while nuclear negotiations would be postponed to a later stage.

Even so, investors are not yet treating this as a decisive turning point. Peace efforts still face significant obstacles, as both sides have not reached agreement on core issues, including nuclear conditions, control of the Strait of Hormuz, and broader regional security demands.

Why Has the Dollar Not Broken Higher?

At the early stage of the conflict, the U.S. dollar benefited from safe-haven flows. However, most of those gains were later erased as markets began pricing in the possibility of a peace agreement. At the moment, the greenback is caught in a tug-of-war: not weak enough to face heavy selling pressure, but not strong enough to stage a clear breakout.

The reason is that markets appear to be pricing in a fairly optimistic scenario: tensions will be contained, and energy supply conditions may gradually stabilize. However, as Kyle Rodda, senior financial analyst at Capital noted, markets may have become too confident about the prospect of peace. If the negotiation process breaks down again, risk assets and currencies could be forced into a sharp repricing.

In other words, the dollar is not simply reflecting the strength of the U.S. economy. It is also reflecting how worried investors are about a much larger question: whether Middle East tensions can be contained, or whether they will continue spreading into energy prices, inflation, and global growth.

The Strait of Hormuz Remains the Biggest Pressure Point

One of the main reasons markets have not been able to stabilize is the effective closure of the Strait of Hormuz. This strategic waterway between Iran and Oman normally carries around one-fifth of global oil and gas shipments. When this route is disrupted, the risk is not limited to oil prices. It can also spill over into production costs, transportation, inflation, and the global growth outlook.

Oil prices continue to reflect this risk. On Monday, Brent crude futures rose to around $106.7 per barrel, while U.S. West Texas Intermediate traded at $95.53 per barrel. Other market reports also showed Brent rising as high as $107.49 per barrel, while WTI climbed to $96.17 per barrel as U.S.–Iran talks stalled.

This is particularly important for the foreign exchange market. When oil prices rise, inflationary pressure tends to increase. When inflation rises, central banks have less room to ease monetary policy. And when interest rates stay higher for longer, global capital flows usually become more cautious.

Japan and the 160 Level: Pressure Builds on the BOJ

The Japanese yen is one of the currencies facing the clearest pressure in the current environment. With USD/JPY approaching the 160 level, markets are paying close attention to the upcoming Bank of Japan policy meeting.

The BOJ is widely expected to keep interest rates unchanged at this meeting, but it may signal its readiness to raise rates in the coming months if the energy shock continues to fuel broader inflation. Analysts expect the BOJ to maintain its policy rate at around 0.75%, while potentially lowering its growth outlook and raising its inflation forecasts.

This puts the BOJ in a difficult position. If it raises rates too soon, Japan’s economy could come under pressure. But if it waits too long, the yen could weaken further, pushing up import costs, especially for energy. A classic central bank dilemma: act too early and cause damage, act too late and cause different damage. Very efficient, naturally.

A Key Week for Central Banks

Japan is not the only focus. Investors are also watching a series of major central bank meetings this week. The U.S. Federal Reserve, the European Central Bank, and the Bank of England are all expected to keep interest rates unchanged, but markets will closely monitor how policymakers assess the impact of the war on inflation, growth, and future rate paths.

In Europe, higher oil prices driven by the conflict have pushed inflation back above the European Central Bank’s 2% target, leading markets to price in the possibility of additional rate hikes later this year. In the United Kingdom, March inflation rose to 3.3%, up from 3.0% in the previous month, showing early signs of pressure from the war and rising energy costs.

Market Outlook: Stability or Sharp Repricing?

In the short term, the U.S. dollar may continue moving within a narrow range if markets do not receive a clear signal from the negotiation process. However, the current sideways movement does not mean risks are low. On the contrary, it shows that markets are waiting for a major catalyst before choosing the next direction.

If the U.S. and Iran reach an agreement to reopen the Strait of Hormuz, oil prices could cool, inflationary pressure may ease, and safe-haven demand for the dollar could weaken. In that scenario, risk assets such as equities, commodity-linked currencies, and some emerging markets could receive support.

On the other hand, if negotiations remain stalled or tensions escalate again, markets could see a sharp repricing: oil prices may rise further, inflation could become more persistent, expectations for rate cuts may be pushed back, and safe-haven flows could return to the U.S. dollar.

Conclusion

The U.S. dollar is stable, but this stability is more about waiting than confidence. Developments surrounding U.S.–Iran negotiations, the Strait of Hormuz, oil prices, and central bank meetings will likely determine the next major direction for global markets.

For investors, this is not a period to rely on a single market scenario. Geopolitical risks remain high, oil prices are still elevated, and central banks are being forced to balance slowing growth against renewed inflation pressure.

In this environment, a more suitable strategy is to closely monitor the reaction of the U.S. dollar, crude oil, and USD/JPY around key levels, while avoiding rushed decisions before clearer signals emerge from both diplomacy and monetary policy.

Source: Reuters