Dollar Back to February Lows

The dollar index fell about 0.5% to below 98 on Friday, marking its lowest level since the conflict with Iran began, as news of the temporary reopening of the Strait of Hormuz helped ease near-term inflation concerns. Iran’s Foreign Minister said that the strait is now fully open to all commercial vessels for the duration of the 10-day ceasefire. In response, oil prices tumbled more than 10%, prompting traders to ramp up bets on Federal Reserve rate cuts this year. Markets are now pricing in roughly a 50–50 chance of a 25-basis-point rate cut by year-end, up from around a 30% probability on Thursday. This still compares with earlier expectations of two rate cuts before the conflict escalated. The greenback weakened broadly, with the sharpest declines against the Swiss franc, Australian dollar, Japanese yen, and the euro. For the week, the dollar index is down about 0.5%, on track for a third consecutive weekly decline.

The dollar index stabilized above 98 on Friday but remained on track for a third consecutive weekly decline, as improving prospects for an end to the US-Iran conflict reduced safe-haven demand and eased inflation concerns tied to energy markets. In the latest developments, President Donald Trump expressed confidence that the war with Iran will end soon, claiming Tehran had agreed to terms including abandoning nuclear ambitions and reopening the Strait of Hormuz. Trump also announced a 10-day ceasefire between Israel and Lebanon, which could support further US-Iran negotiations. Oil prices have continued to retreat, helping to temper inflation expectations and reducing bets that the Federal Reserve will need to tighten policy. Fed Bank of New York President John Williams said heightened uncertainty should limit forward guidance on the policy path, although his baseline outlook still includes rate cuts over the longer term.

The dollar index edged up above 98 on Thursday but remained near the pre-war lows seen in the previous session, as investors grew increasingly optimistic that the US and Iran could soon reach an agreement to end the conflict and reopen the Strait of Hormuz, reducing safe-haven demand. US President Trump said the seven-week conflict was “close to over,” while the White House expressed confidence in a potential deal, noting that additional in-person talks could take place in Pakistan. However, Iranian officials signaled that significant differences remain, particularly regarding nuclear issues. Meanwhile, softer crude prices in recent days have helped ease inflation concerns. The Federal Reserve is widely expected to keep interest rates on hold throughout the year, a view reinforced by recent comments from several policymakers, including Federal Reserve Bank of New York President John Williams.