Currency markets were driven by three main forces in May: geopolitical risk, energy disruption and central bank policy. The US dollar strengthened through much of the month as US Treasury yields rose, equity markets remained firm and tensions between the US and Iran continued to shape market sentiment.
The Strait of Hormuz was a key focus. Concerns over a prolonged closure raised the risk of higher energy inflation and weaker growth. Governments also introduced energy conservation measures, adding to the sense that the disruption could have wider economic effects. This made energy exposure, inflation risk and safe-haven demand more important for currency markets.
Sentiment improved towards the end of May after reports of a 60-day memorandum between the US and Iran to extend the ceasefire and fully reopen the Strait of Hormuz. Risk-sensitive currencies rallied as the dollar weakened. The move was also helped by weaker US first-quarter GDP, lower corporate profits and softer PCE inflation. Together, these factors reduced some pressure on markets and supported the view that US policy may not need to stay as tight as feared.
In early June, the dollar recovered after Iran suspended talks in response to the ongoing Israeli invasion of Lebanon. This showed how quickly currency markets can change when geopolitical risk returns. It also reinforced the importance of timing, as shifts in diplomacy, energy supply and inflation expectations can quickly affect positioning.
Japan remained an important part of the market story. The Ministry of Finance intervened several times from late April to mid-May to slow the rise in USDJPY. The action pushed the exchange rate back below 160, a level watched closely by markets. However, the effect faded as dollar strength returned on renewed Iran War risk, stronger US inflation data and a more hawkish view of the Federal Reserve.
The Federal Reserve also became more supportive for the dollar. At its late-April meeting, several members voted to move the policy bias from easing to neutral. No members called for rate rises in 2026, but market pricing still shifted from no change to two rate increases by year end. That change gave the dollar further support and kept attention on inflation, growth and future Fed guidance.
In Europe, the Swiss franc performed better than many other major currencies as weaker risk appetite increased demand for safe-haven assets. However, Swiss National Bank officials warned against excessive franc strength, especially against the euro. This limited the market’s willingness to push the currency much higher.
Sterling weakened as political uncertainty increased after Labour performed poorly in local elections and speculation grew about a possible leadership challenge against Prime Minister Starmer. The Bank of England left rates unchanged, balancing higher inflation risks against a weaker growth outlook. The European Central Bank signalled rate rises for the summer, which markets had largely expected, although the full path for rates remained unclear as the Eurozone continued to deal with the wider impact of the Iran War.
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