USD Faces Pressure as US-Iran Tensions Escalate, Markets Await Deal

The US dollar is trading with a cautious tone as European markets open, with risk sentiment turning tepid amid escalating US-Iran military tensions. The US military conducted what it described as 'self-defense' strikes against Iran, with Tehran condemning the action as a violation of the April ceasefire agreement. Despite the escalation, markets are holding out hope that a US-Iran diplomatic deal could materialize this week, preventing a full-blown conflict. Safe-haven flows are providing modest support to traditional havens like JPY and CHF, while risk-sensitive currencies face headwinds. Oil prices remain elevated on supply disruption fears, indirectly pressuring commodity-importing nations' currencies. Traders should monitor USD/JPY and USD/CHF for safe-haven dynamics, while EUR/USD could see volatility as European traders digest overnight developments. Near-term direction hinges on whether diplomatic channels produce concrete progress. Geopolitical risk premiums are likely to keep volatility elevated across major pairs, with potential for sharp reversals on any breakthrough or further escalation in the conflict.