The US Dollar Index comes under pressure after Israel and Lebanon reach a ceasefire agreement.

• The US Dollar Index retreats as improving market sentiment follows reports that Israel and Lebanon agreed to renew their ceasefire on Wednesday.
• Risk appetite remains tempered, however, after President Trump warned that the ceasefire could be scrapped if Iran-backed forces were responsible for the deaths of US troops.
• The Greenback could regain momentum if robust US employment data for May strengthens expectations that the Federal Reserve will keep interest rates elevated or raise them further.

The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, remains under pressure after posting gains for three consecutive sessions, hovering near 99.50 during Thursday’s Asian trading hours.

The US Dollar softened as risk sentiment improved following news that Israel and Lebanon agreed on Wednesday to renew their ceasefire. The deal, reached after US-mediated talks in Washington, is contingent on a “complete cessation” of hostilities by Iran-backed Hezbollah.

Although Israel and Lebanon do not maintain formal diplomatic ties, both sides also agreed to establish several pilot security zones where the Lebanese Armed Forces will exercise exclusive control, preventing the presence of non-state armed groups.

However, the improvement in market sentiment remained limited. According to reports from the Wall Street Journal, US President Donald Trump told advisers he could reconsider the ceasefire arrangement if Tehran were responsible for the deaths of US troops. Trump maintained that the week-long suspension of airstrikes remains in effect despite continued clashes in the region. He also indicated in an interview with the New York Post that a blockade extending through Labor Day remains a possibility, potentially delaying expectations for the reopening of the Strait of Hormuz.

Meanwhile, the Greenback could find renewed support as investors increasingly anticipate that the Federal Reserve may tighten monetary policy further this year. Better-than-expected US labor market indicators, including May’s ADP private employment figures and JOLTS job openings data, reinforced confidence in the resilience of the US economy and strengthened the case for higher interest rates for a longer period.

Market expectations have shifted notably as the ongoing conflict involving Iran continues to disrupt energy markets, lifting oil prices and fueling inflationary pressures. According to the CME FedWatch Tool, traders are now pricing in roughly a 42% probability of a Federal Reserve rate hike by December.