Euro Drops Near Six-Week Low Amid Middle East Unrest

The euro fell to $1.161, nearing a six-week low, as rising Middle East tensions dimmed hopes for a swift resolution to reopen the Strait of Hormuz and fueled concerns about the Eurozone’s economic health. Brent crude climbed to around $97 a barrel after reports of US airstrikes on an Iranian military site and new sanctions targeting Iran’s revenue from ships transiting the strait. A US official emphasized the defensive nature of the strikes and reaffirmed the country’s commitment to last month’s ceasefire. Adding to the unrest, Kuwait reported countering hostile drone and missile threats, deepening regional instability. Money markets increased their bets on European Central Bank interest rate hikes, pricing in just under 65 basis points of tightening this year, up from just under 60 basis points late on Wednesday.

The euro hovered around $1.164, close to a six-week low, amid optimism over a potential US-Iran peace deal and reduced expectations for ECB rate hikes. Investors continue to monitor Middle East developments, encouraged by the recent lack of negative signals from both sides and persistent hopes that an agreement to ease tensions and reopen the Strait of Hormuz remains possible despite recent strikes. Money markets now expect the ECB deposit rate to reach 2.6% by December, up from the current 2% but below last week’s 2.75% projection, with an 80% chance of a rate hike next month. Meanwhile, ECB official Isabel Schnabel told Reuters the central bank should still raise interest rates in June even if a peace deal is reached, citing the scale and persistence of the energy shock.

The euro was little changed at $1.164, trading near a six-week low touched last week, as renewed Middle East unrest dampened market sentiment. Optimism about a resolution to the three-month US-Iran conflict, which has severely disrupted Middle Eastern oil and gas supplies and driven global inflation higher, faded after Washington confirmed defensive strikes in southern Iran, signaling that any peace deal remains distant. On the policy front, ECB official Isabel Schnabel told Reuters the central bank should raise interest rates in June even if a peace agreement is reached, citing the scale and persistence of the energy shock. Other policymakers have also recently argued for tighter policy. Money markets now price in a near 90% chance of a June hike, with roughly 60 basis points of tightening expected by year-end, pointing to at least two quarter-point increases.