2026-05-12 · generated by deepseek-v4-flash

Dollar Mixed as Fed Rate Cut Hopes Fade; Geopolitical Risks Boost Haven Demand

The dollar traded mixed as hawkish Fed commentary and a weak nonfarm payrolls revision dampened rate cut hopes, while escalating Middle East tensions boosted safe-haven flows. The offshore yuan strengthened on new FX policy pilot in Qianhai.

Overview

The dollar saw mixed trade on Tuesday as markets digested a raft of Fed commentary pushing rate cut expectations further out. Bank of America revised its forecast to no cut before 2027, while bond king Gundlach warned that hopes for a 2026 cut "may have completely extinguished." Chicago Fed's Goolsbee reiterated that "positive inflation progress" would be needed for easing, but that progress has not yet appeared. Meanwhile, the monthly nonfarm payrolls were revised down by a net 16,000 for February and March, though the April headline came in at a strong 115,000. The University of Michigan's 1-year inflation expectation dipped to 4.5% (below the 4.8% consensus), providing a slight relief for the dollar bears, but the overall tone remains hawkish.

USD/CNY – Yuan Strengthens on Policy Tailwinds

The offshore yuan rallied, gaining 116 pips overnight to close at 6.7971, while the onshore pair settled at 6.8005, up 63 pips from the previous night's close. The move was driven by the implementation of two foreign exchange facilitation pilot policies in the Qianhai Free Trade Zone, with the first batch of transactions already settled. Broader support came from China's continued opening-up narrative, with foreign firms underscoring that the Chinese market is "indispensable." Data also showed Jiangsu's foreign trade growing 17.2% year-on-year in Q1, and the first-quarter service trade surplus narrowing, all reinforcing confidence in the yuan.

Geopolitical Tensions & Safe-Haven Demand

Escalating geopolitical risks kept safe-haven flows active. Iran's armed forces engaged in skirmishes with US vessels in the Strait of Hormuz, while the UK deployed the destroyer HMS Dragon to join the escort mission in the same waterway. Iran is reportedly drafting a legal framework for the Strait, adding to uncertainty. In parallel, President Putin stated that the Russia-Ukraine conflict is "moving toward an end." These developments sustained demand for traditional havens such as the Japanese yen and Swiss franc, though explicit price action was muted during the US session. The Federal Reserve's latest survey cited geopolitical conflict and oil supply shocks as the top risks to US financial stability.

EUR/USD – ECB Commentaries in Focus

The euro traded within a familiar range as ECB speakers offered a mixed stance. Governing Council member Escrivá highlighted AI risks as a reason to review financial infrastructure resilience, while colleague Nagel pledged to take necessary measures to contain energy-driven inflation. The US inflation expectations data provided a modest lift to risk sentiment, but the dollar's yield advantage persists. EUR/USD remains sensitive to any further shifts in the Fed's dovish tail-risk, which currently appears minimal.

Outlook

Traders will monitor Iran's response to the latest US peace proposal (expected "soon" per Trump) and any further Fed commentary. The yuan's rally may face resistance near 6.79 as the PBOC likely defends stability. Geopolitical triggers remain the dominant short-term driver for the major pairs.