Euro Falls as US-Iran Tensions Escalate

The euro dipped below $1.17, retreating from a six-week peak of $1.174 reached on Friday, as prospects for a US-Iran peace deal dimmed. Negotiations in Pakistan collapsed after Tehran dismissed Washington’s demands, with both sides showing little willingness to resume talks. Adding to market unease, US President Donald Trump threatened a naval blockade of the Strait of Hormuz and suggested limited military strikes against Iran, despite an existing ceasefire. The strategic waterway’s significance sent oil prices skyrocketing, Brent crude climbed to around $102 per barrel, and led markets to anticipate a more aggressive stance from the European Central Bank, with traders now pricing in nearly three interest rate hikes by year-end, up from two just last week.

The euro traded above $1.17, reaching its highest level since late February and heading for a nearly 1.5% weekly gain against the US dollar, amid optimism over a potential Russia-Ukraine peace deal and as investors adopted a cautious wait-and-see approach ahead of the US-Iran ceasefire negotiations this weekend. Ukraine’s lead negotiator signaled progress in talks with Russia, suggesting a resolution to the conflict could be achieved sooner than expected. Meanwhile, US and Iranian negotiators are set to meet on Saturday, though tensions remain elevated. Tehran continues its near-total blockade of the Strait of Hormuz, while US President Trump struck a dual tone, expressing optimism about a possible deal but later warning Iran over new fees imposed on ships transiting the vital waterway. On the monetary policy front, rising oil prices stoked inflation fears, leading markets to price in a more hawkish ECB, with traders expecting at least two rate hikes by end-2026.

The euro held just above $1.17, its highest level since late February and on track for a near 1.5% weekly gain against the US dollar, as investors remained focused on the fragile US-Iran ceasefire and the upcoming negotiations in Pakistan this weekend. Tehran sustained its near-total blockade of the Strait of Hormuz, causing the worst disruption to global energy supplies in history while insisting on Lebanon’s inclusion in peace talks. Meanwhile, US President Trump struck a mixed tone, expressing optimism about a potential deal but later warning Iran over new fees imposed on ships passing through the critical waterway. On the monetary policy front, rising oil prices reignited inflation concerns, prompting markets to price in a more hawkish European Central Bank. Traders now anticipate at least two ECB rate hikes by the end of 2026, with a 30% chance of a third increase.