Dollar Falls after Trump Says Iran Seeking Deal; ECB Tightening Bets Jump

The dollar extended its retreat Tuesday. Donald Trump said Iran is seeking a deal, reviving hopes for de-escalation after weeks of rising tensions. The S&P 500 rose. Brent crude pulled back from local highs. Treasury yields fell. The combination weighed on the dollar index.

Brent crude stabilized above $76 a barrel. Tanker traffic through the Strait of Hormuz has fallen to about 25 ships a day from a typical range of 30 to 50, according to shipping data. The drop is the steepest since the 2019 attacks on Saudi Aramco facilities. Hopes for talks between the US and Iran have capped the oil rally, traders said. The oil price has not reacted sharply, reflecting the market's expectation that a diplomatic solution will prevent a full blockade. The retreat in oil eased some pressure on European central banks.

Futures pricing now shows a 50% probability of two rate hikes by the ECB and the Bank of England in 2026. The probability of an ECB deposit rate hike in September stands at 90%, based on swap pricing. The ECB's June meeting minutes flagged that inflation would stay above the 2% target through the first half of 2027 even if the central bank raised rates three times by then. The bank remains wary of repeating its 2022 mistake. It was slow to tighten while consumer prices soared. The economy is weaker now and borrowing costs are higher. Policymakers fear that rising energy prices could become embedded in core inflation. The ECB faces a difficult trade-off. The eurozone economy is weaker than in 2022, and borrowing costs are already higher. Policymakers fear that a sustained oil rally could feed into core inflation and inflation expectations. The June minutes highlighted that inflation would remain above target even with three rate hikes. The minutes suggest the bank may need to act sooner rather than later.