Dollar Weakens as Tensions Ease in Middle East

The US dollar has weakened modestly at the start of this week following the de-escalation of geopolitical risks in the Middle East. The pause in military strikes by the US against Iran has led to a halt in Iranian retaliation, and talks between Iranian and Imani officials have made some progress in resolving shipping through the Strait of Hormuz. As a result, energy supply concerns have eased, causing Brent crude oil prices to drop below $90/barrel after hitting a high of $102/barrel last week.

The correction in energy prices has dampened rate hike expectations for central banks ahead of their latest policy meetings this week. However, one FOMC participant, Dallas Fed President Lorie Logan, favours modestly higher rates to balance the outlook and risks for the US economy. If the Fed delivers a hawkish surprise and hikes rates, it could give the US dollar renewed upward momentum.

The pause in military strikes has also led to uncertainty about how long it will last and when traffic through the Strait of Hormuz will resume. Despite this, the positive developments have given the market some breathing room, with short-term US yields dropping back from their highest levels since early 2025.