Market sentiment shifted following an Axios report, which cited two U.S. officials as saying that the United States and Iran had reached a tentative 60-day memorandum of understanding aimed at extending the ceasefire and opening negotiations over Iran’s nuclear programme.
According to the report, the proposed understanding still requires approval from U.S. President Donald Trump before implementation.
Although the development boosted investor appetite for riskier assets and weakened demand for the dollar as a safe-haven currency, analysts remained cautious, noting that similar reports during the three-month conflict have failed to produce a lasting agreement.
Reuters stated that it had not independently verified the Axios report, while previous reports published in April, May 6, and May 23 had also suggested potential diplomatic breakthroughs that ultimately did not materialise.
The latest report nevertheless influenced currency markets, with the euro gaining 0.24 percent against the dollar to trade at $1.1652.
The U.S. currency also weakened against the Swiss franc, falling 0.34 percent to 0.784 francs.
Similarly, the dollar index, which measures the strength of the greenback against a basket of major currencies including the euro and the Japanese yen, declined by 0.3 percent to 99.02.
The drop placed the index on course to end two consecutive sessions of gains that had followed renewed hostilities involving the United States and Iran.
Analysts say the dollar has remained highly sensitive to developments in the Middle East conflict in recent weeks, strengthening whenever investors fear prolonged instability and retreating whenever signs of diplomatic progress emerge.
Beyond geopolitics, fresh U.S. economic data also shaped market expectations around interest rates and Federal Reserve policy.
Data released on Thursday showed that U.S. inflation accelerated in April at its fastest pace in three years, largely driven by rising energy prices linked to the conflict in the Middle East.
The personal consumption expenditures (PCE) price index — the Federal Reserve’s preferred inflation measure — rose 0.4 percent month-on-month in April after increasing 0.7 percent in March.
However, core PCE inflation, which excludes food and energy prices, increased by a more moderate 0.2 percent in April following a 0.3 percent rise in March.
At the same time, revised economic figures showed that U.S. economic growth in the first quarter was weaker than previously estimated.
According to Joel Kruger, market strategist at London-based LMAX Group, the softer inflation and growth figures may ease pressure on the Federal Reserve to maintain an aggressive interest rate stance.
“The combination of core PCE, which came in a little bit softer, and the growth data also coming in a little softer sends a message that perhaps the Fed can be a little bit less aggressive with its higher-for-longer, which is somewhat risk-supportive,” Kruger said.
“Ultimately, until we figure out a resolution to the geopolitical side and what it's going to be with inflation, it's a lot of kind of just choppy and directionless trade.”
Meanwhile, investors also continued to monitor developments in Japan amid growing speculation that Japanese authorities could intervene again to support the yen if the currency weakens further.
The yen strengthened slightly against the dollar, rising 0.14 percent to trade at 159.27 per dollar, still hovering close to the psychologically significant 160-per-dollar level that previously triggered intervention concerns.
Elsewhere, commodity-linked and risk-sensitive currencies posted gains as investor confidence improved.
The Australian dollar rose 0.25 percent to $0.71590, maintaining its position as the best-performing G10 currency against the U.S. dollar this year, with gains of more than 7 percent year-to-date.
The New Zealand dollar also advanced by 0.4 percent to $0.59275, extending gains recorded in the previous session after the Reserve Bank of New Zealand adopted a more hawkish monetary policy tone.
Market analysts say investors will continue to monitor both geopolitical developments and central bank signals closely in the coming weeks, as uncertainty surrounding inflation, interest rates, and global conflict continues to shape currency market direction.