US dollar holds ground but faces downside risks

The US dollar remained relatively stable after a series of declines as markets monitor the developments in the Middle East.

However, it could remain exposed to the downside if geopolitical tensions continue to recede, which could limit the demand for the currency as a safe-haven asset.

Clear diplomatic progress in the Middle East could fuel appetite for risk and drive flows out of the dollar.

Additionally, a clear path toward the reopening of the Strait of Hormuz could lead to lower oil prices, limiting inflationary concerns, and could drive Treasury yields to the downside. The latter could also add to the pressure on the currency.

At the same time, monetary policy expectations remained cautious at the moment, with forecasts pointing to a hold on interest rates. The latter could help support the currency to a certain extent. However, any shift toward more dovish expectations, particularly if supported by moderating inflation and weaker energy prices, could push yields and the dollar to the downside.