Oil prices declined following a US-Iran ceasefire agreement, reducing the demand for the US dollar as a safe-haven asset. On Wednesday, news of a two-week truce between the United States and Iran caused Brent crude futures to drop sharply by 16%, marking the largest single-day decline in nearly six years. Prices later recovered somewhat.
As risk aversion eased, the US dollar index also faced pressure. The ICE US Dollar Index fell by as much as 1.2%, wiping out all its gains for the year, while the Bloomberg Dollar Spot Index declined by 0.8%, recording its worst daily performance since January.
The US dollar weakened against all 16 major currencies, with the euro, British pound, and Japanese yen each rising more than 1% during the session. However, according to reports, the Strait of Hormuz was closed again on the 8th. Earlier, following an Israeli attack on Lebanon, Iran had suspended oil tanker traffic through the strategic waterway. As a result, risk assets pared some of their gains, and the US dollar rebounded 0.6% from its daily low.
The ceasefire triggered a rapid unwinding of long positions. News of the two-week truce prompted markets to reassess the easing of tensions in the Middle East. The dollar's previous strength had partly stemmed from its status as a relative safe-haven asset and the perception that the US economy was more resilient to global energy shocks.
Leah Traub, a portfolio manager at Lord Abbett & Co., commented, "This is a pure relief rally, especially after the escalation early last week. Given the disproportionate negative impact of war and energy price shocks on regions outside the US, it is entirely logical that non-US markets are rebounding more strongly."
Market participants noted that the rapid fluctuations in the foreign exchange market on Wednesday partly reflected traders closing long dollar positions, although underlying investor sentiment had not fundamentally shifted. A Citigroup foreign exchange strategy team wrote in a report, "With the two-week ceasefire as an anchor, leveraged investors are more inclined to redeploy sidelined capital. This dynamic makes us hesitant to buy the dollar on dips for now."
Renewed expectations for interest rate cuts also weighed on the dollar, though uncertainty remains. During the Middle East conflict, surging energy prices reignited inflation concerns, leading markets to significantly scale back expectations for Federal Reserve rate cuts. As oil prices retreated, expectations for rate hikes by the European Central Bank and Bank of England this year diminished noticeably, while bets on a Fed rate cut in 2026 regained momentum. Current market pricing suggests about a 33% probability of a rate cut within the year.
Analysts pointed out that if the decline in oil prices continues, expectations for rate cuts could strengthen further. Sentiment shifts in the foreign exchange options market support this view. An index measuring expected volatility for a basket of currencies against the dollar over the next month fell to its lowest level since the conflict began. Options data indicated that traders' bullish sentiment toward the dollar contracted significantly during the same period. According to Bloomberg-compiled data from the Depository Trust & Clearing Corporation, options trading volume on Wednesday was about 11% above recent averages, with particularly active trading in the euro and pound.
The key variable remains whether the Strait of Hormuz can remain open. Andrew Hazlett, a foreign exchange trader at Monex Inc., stated, "The ceasefire news and easing energy crisis concerns have put significant pressure on the dollar. The core question in the coming days will be: To what extent will shipping resume through Hormuz, and can this lead to a sustained de-escalation?"
Bloomberg macro strategist Skylar Montgomery Koning also noted that Brent crude has only retraced about half of its recent gains, suggesting that the dollar's decline may have slightly exceeded what commodity signals would support. She added that longer-term currency movements will depend on how much real economic damage has already been caused by the earlier shock.
Despite a noticeable improvement in market sentiment, the stability of the ceasefire agreement remains in doubt. On Wednesday, maritime traffic tracking data showed that the oil tanker "Aurora," which had been heading toward the exit of the Strait of Hormuz, suddenly changed course near the coast of Oman's Musandam Peninsula, turning 180 degrees and returning deep into the Persian Gulf. Fighting in the Middle East has not completely ceased, and the Strait of Hormuz remains blocked, highlighting the fragility of the agreement. This suggests that if tensions escalate again, the dollar's decline could reverse quickly.
Kathleen Brooks, research director at XTB, remarked, "While there are reasons to remain cautious, the scale of market movement has been remarkable. This remains a headline-driven market, and any sign that the ceasefire is under threat could trigger sharp volatility again."
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