Good morning. In subdued trading, oil prices are extending their decline, equities are advancing, Treasury yields are easing from recent highs, and currency markets remain dormant after President Trump said talks with Iran are in the “final stages”—leaving many investors awaiting something more conclusive. Trump warned that Washington could resume strikes within days if peace talks fail to advance, while Tehran cautioned that any renewed aggression would trigger a conflict extending “beyond the region”. Although a number of oil tankers have crossed after coordinating with Iranian authorities, the Strait of Hormuz remains largely closed to international shipping, sustaining history’s biggest disruption to worldwide energy supplies and fuelling the stagflationary pressures that are pushing up interest rates and lowering global growth expectations. The Australian and Canadian dollars, along with their safe-haven counterparts in Switzerland and Japan—currencies that would ordinarily move in opposite directions if conviction in a peace deal were high—are essentially unchanged.

Nvidia shares fell 1% last night—avoiding the sort of move that might have impacted currency markets—even after the company reported earnings growth of 85% year on year, projected current-quarter sales of $91bn, and announced $80bn in stock buybacks. Investors may have been expecting an even larger beat, but attention was also diverted by SpaceX’s filing of a prospectus ahead of its initial public offering, which is expected to value the company at around $2tn—despite a net loss of $4.28bn on revenue of $4.69bn in the first quarter—with ambitions to “develop orbital AI compute at scale, manufacture AI chips at scale, establish a lunar economy, develop human augmentation systems, and transport humans and cargo to the Moon and Mars”.

Here on Earth, both the euro and pound are back on the defensive after survey data showed private sector activity weakening sharply in early May as a war-driven rise in living costs hammered consumers and weighed on business investment plans. S&P Global said its euro-area composite purchasing manager index tumbled to 47.5 in May from 48.8 in April—below the 50 threshold separating economic expansion from contraction and its lowest since October 2023—as cost pressures intensified and demand for goods and services plummeted. A similar index in the UK fell to 48.5 from 52.6 in April, reflecting a sharp drop in business confidence related to the conflict in the Middle East, spiking energy prices, and uncertainty relating to the leadership contest currently underway within the Labour Party. Expectations for rate hikes from the European Central Bank and Bank of England are still elevated, but are moderating as growth projections slip.

Traders are trimming bets on an imminent decline in the dollar after Federal Reserve officials turned substantially more hawkish at last month’s meeting, with a clear consensus forming around the possibility that a return to tighter policy could be needed later this year. According to the record of the late-April discussion released yesterday, “almost all” participants felt that oil and other commodity prices could remain elevated even after the conflict in the Middle East ends, with a “vast majority” warning this could keep underlying inflation above 2% and a “majority” suggesting rate hikes could be warranted if inflation were to run persistently above target. As we had suspected, “Many would have preferred removing the language from the post-meeting statement that suggested an easing bias,” implying that dissenters weren’t alone in lobbying for a more aggressive posture on rates.

A deal to reopen the Strait of Hormuz would likely trigger a knee-jerk move in favour of risk-sensitive currencies against the dollar, but a big drop over the summer months is growing harder to envisage. There has been little evidence of safe-haven flows boosting the greenback in recent weeks, speculative positioning remains light, and cross-currency rate differentials could shift in a somewhat counter-intuitive fashion were global inflation expectations to ratchet lower. While a peace agreement would ease energy costs and take some heat out of US headline inflation, it would do so even more dramatically for energy-importing economies in Europe and Asia, where central banks would face less pressure to lift rates more aggressively. The resulting compression in rate expectations abroad relative to the Fed—where sticky core inflation and a resilient labour market already argue for a higher-for-longer stance—could widen rate differentials in the greenback’s favour.

We may be in the early stages of a prolonged decline, but—as ever—rumours of the dollar’s death tend to be greatly exaggerated. Hedgers should prepare for frequent reversals in the coming months.