The US Dollar Index slipped to around 100 in Monday’s Asian trading session, reflecting a modest improvement in market sentiment. The index, which tracks the dollar against a basket of six major currencies, came under pressure as investors reduced some defensive positioning ahead of a busy week of US economic data and policy signals.
A key driver of the softer tone was renewed optimism over diplomatic developments in the Middle East. US President Donald Trump said on Sunday that a planned strike on Iran had been canceled and that discussions between Washington and Tehran would begin on Monday. He also indicated that an agreement related to reopening the Strait of Hormuz may be close, while the broader effort to curb Iran’s nuclear program would continue. Any easing in geopolitical tensions tends to weaken demand for the dollar as a haven asset.
Attention now turns to the US ISM Manufacturing Purchasing Managers Index, due later on Monday, which could offer an early read on the health of the industrial sector. More importantly, markets are focused on Friday’s employment report, which is expected to show nonfarm payrolls rising by 91,000 in July and the unemployment rate edging up to 4.3%. A stronger-than-expected result would likely help steady the dollar and limit further declines.
The latest Federal Reserve meeting also remains a factor. The central bank left interest rates unchanged in July, and traders have since trimmed expectations for a September rate increase. Pricing in the futures market now implies a lower probability of a hike than before the meeting, suggesting that investors are becoming less confident the Fed will tighten again soon.
Analysts at Commerzbank said the dollar could face additional downside if tensions with Iran continue to ease, arguing that the currency’s recent support from geopolitical risk may fade. They added that the dollar may be especially vulnerable if incoming US data fail to justify the more aggressive rate expectations that have been embedded in markets.The USD/CAD pair started the week with modest gains, but the advance has lacked conviction as the exchange rate remained trapped within Friday’s trading range. It was last seen near 1.403, up slightly on the day, with the market still weighing competing forces that are pulling the pair in opposite directions.
A sharp drop in crude oil prices has been a key support for USD/CAD. Oil weakness tends to weigh on the Canadian dollar because of Canada’s heavy exposure to energy exports. Sentiment in the oil market deteriorated after developments in the Middle East reduced fears of an immediate escalation, while OPEC+ also agreed to lift output in September by 188,000 barrels per day. The combined effect has pressured crude and weakened the Loonie.
Even so, gains in USD/CAD have been limited by a softer US dollar. Broader selling of the greenback has kept the pair from building momentum, as traders scale back expectations for near-term Federal Reserve tightening. The retreat in the US dollar index, which has fallen to its lowest level since mid-June, has also made it more difficult for the pair to sustain a rebound from last Thursday’s one-and-a-half-month low below 1.400.
Lower oil prices have also eased some inflation concerns, reinforcing the view that the Fed may not need to respond aggressively in the near term. That said, the market remains cautious, as currency flows have recently been driven by shifting risk sentiment and short-covering activity in yen-related trades.
Attention now turns to a busy week of economic releases. The first key data point is the ISM Manufacturing PMI in the United States later on Monday, but the main event will be Friday’s monthly employment reports from both the US and Canada. Those figures are likely to play a central role in determining the pair’s next direction. Additional headlines from the Middle East may also keep volatility elevated in the days ahead.
