Dollar heads for weekly loss on reports of US-Iran ceasefire deal

The US dollar extended its weakness against major currencies on Friday and was on track to end the week lower after reports that the US and Iran reached an agreement to extend the ceasefire in the Middle East and lift restrictions on shipping through the Strait of Hormuz. For traders scanning the forex market analysis desk, the move compresses the geopolitical risk premium that had been built into the greenback since the conflict escalated. The simple read is that a de-escalation reduces the dollar's safe-haven appeal. The better read traces a chain through oil supply, inflation expectations, and the Federal Reserve rate path.

Dollar's Safe-Haven Premium Unwinds

A ceasefire extension removes one of the primary tail risks that had kept a bid under the dollar index since early October. During periods of heightened geopolitical stress, the US currency benefits from its status as the world's primary reserve and safe-haven asset. As those tensions ease, capital that rotated into dollar-denominated cash and Treasuries tends to move back into higher-yielding and risk-sensitive currencies. This week's reported progress explains the bulk of the dollar's weakness against the euro, the yen, and the British pound. The EUR/USD profile shows that pair pressing into resistance levels that had held for weeks.

Strait of Hormuz: The Oil Supply Channel

The lifting of shipping restrictions through the Strait of Hormuz is not only a geopolitical event–it is a direct mechanism for oil supply normalization. The strait sees about one-fifth of the world's petroleum transit daily, and any disruption threat had embedded an oil price risk premium that fed into inflation expectations. With that premium unwinding, crude oil prices face downward pressure. Lower oil prices reduce input costs for import-dependent economies, which in turn affects central bank policy outlooks. The Bank of Japan and the European Central Bank, both wrestling with inflation dynamics tied to energy costs, may see a less urgent case for tightening. This dynamic alters rate differentials between the dollar and the yen or euro, further weighing on the greenback.