The dollar extended its retreat Tuesday after Donald Trump said Iran is seeking a deal. The S&P 500 rose. Brent crude pulled back from local highs while Treasury yields fell. Those moves together created headwinds for the dollar index.
The oil rally has revived fears of monetary tightening in Europe. Futures markets price a 50% chance of two ECB and Bank of England rate hikes in 2026. They put a 90% probability on an ECB deposit rate increase in September. The ECB's June minutes noted that inflation would stay above the 2% target through the first half of 2027 even with three rate increases by that point.
The ECB drew heavy criticism for being slow to raise rates in 2022 when consumer prices soared. Officials do not want to repeat that mistake, though the situation is different now. The eurozone economy is weaker and borrowing costs are already higher. Still, policymakers fear rising energy prices will embed into core inflation and lift inflation expectations.
Futures markets assign only a 40% probability of two Federal Reserve rate hikes this year. That is lower than the ECB figure, a gap that supports EUR/USD.
Brent crude stabilized above $76 a barrel. Traffic through the Strait of Hormuz has slowed sharply, with tanker transits falling to 25 from a range of 30–50 in recent days, according to shipping data. Hopes for US-Iran talks have prevented a bigger oil rally despite the supply disruption.
The dollar's weakness allowed USD/JPY bears to push the pair lower. Finance Minister Satsuki Katayama added pressure by calling on pension funds, including the GPIF, to increase investments in Japanese assets. Traders said the statement proved more effective at weakening the dollar than recent verbal intervention.
