2026-05-10 · generated by deepseek-v4-flash

Dollar Steady After Mixed Jobs Data; Geopolitical Tensions Loom Over FX

The dollar held steady after April's stronger-than-expected payrolls but lower inflation expectations and hawkish Fed remarks capped gains. Geopolitical tensions in the Strait of Hormuz and China's FX liberalization added fresh cross-currents.

Dollar and Fed Policy The U.S. dollar traded mixed on Monday after Friday's April nonfarm payrolls report showed a gain of 115,000 jobs, handily beating market expectations. However, the Labor Department's net downward revision of 16,000 for the prior two months tempered the optimism. The University of Michigan's May 1-year inflation expectation slipped to 4.5% from 4.7%, below consensus, while the 5-year reading eased to 3.4%. Fed officials remained cautious: Chicago Fed President Goolsbee said positive inflation progress would lead to rate cuts, but such progress has not yet materialized. Bank of America revised its forecast, now seeing no rate cuts until 2027, echoing bond king Gundlach's warning that the hope for a 2026 cut is "completely extinguished." The Fed's own Financial Stability Report highlighted geopolitical conflict and oil supply shocks as top risks. The DXY index hovered near recent highs, with further direction hinging on upcoming CPI data and FOMC minutes.

Euro and ECB The euro struggled to find traction as European Central Bank speakers addressed emerging risks. Governing Council member Escrivá warned that artificial intelligence risks are prompting a review of financial infrastructure resilience, underscoring the ECB's role as the ultimate backstop for stablecoin risks. Meanwhile, fellow Council member Nagel reiterated that the ECB will take necessary measures to control energy price pressures, which could feed through to inflation. The euro remained under pressure against the dollar as the rate differential persists, with EUR/USD trading around 1.0850. The pair's next catalysts include eurozone growth data and ECB's June meeting minutes.

Yen and Safe-Haven Flows The Japanese yen firmed modestly amid escalating geopolitical risks in the Middle East. Reports of sporadic clashes between Iranian forces and U.S. vessels near the Strait of Hormuz, combined with Iran's drafting of a new law on the strait, have increased supply concerns. The UK also announced the deployment of the destroyer HMS Dragon to the region for escort operations. These developments boosted demand for traditional safe havens, with USD/JPY sliding back toward 131.00. The yen also drew support from a slight dip in U.S. Treasury yields after the inflation expectations data. Traders will keep a close eye on any further escalation, as well as any BoJ intervention warnings.

Chinese Yuan and Policy Moves The Chinese yuan strengthened against the dollar on Friday, with offshore USD/CNH falling 116 pips to 6.7971 and onshore USD/CNY closing at 6.8005, up 63 pips. The appreciation was supported by two new pilot policies in the Qianhai Free Trade Zone, which liberalize foreign exchange and capital account procedures. This aligns with China's broader push to attract foreign investment, as highlighted by commentary that "China's market cannot be missed." Additionally, strong trade data from Jiangsu province—exports and imports up 17.2% in Q1—and a 2.3% rise in Q1 services trade provided a positive backdrop. The yuan's near-term trajectory will depend on the PBOC's fixing and global risk appetite.

Commodity Currencies and Oil Risk The Canadian dollar, Norwegian krone, and other oil-sensitive currencies faced headwinds on Monday as crude prices slipped despite the Middle East tensions. The market appears to be pricing in a limited supply disruption, though the risk remains elevated. The Fed survey earlier this week cited oil supply shocks as a major financial stability risk. For the time being, commodity FX remains range-bound, awaiting clearer direction from central bank policy paths and geopolitical developments.