Dollar Slides on Iran De-Escalation; EURUSD Gains on ECB Tightening Odds

The dollar fell after Donald Trump said Iran is seeking a deal, repeating a pattern that has played out several times since April. The S&P 500 rose. Brent crude pulled back from intraday highs. Treasury yields ticked lower. The combination pressured the greenback.

The oil rally has revived expectations for tighter monetary policy in Europe. The futures market prices a 50% probability that the European Central Bank and the Bank of England each deliver two rate increases in 2026. It also assigns a 90% chance that the ECB raises its deposit rate in September. Minutes from the ECB's June meeting showed the bank sees inflation staying above the 2% target through the first half of 2027 even if it tightens three times by then. The ECB was criticized in 2022 for moving too slowly when consumer prices surged. The situation now is different. The eurozone economy is weaker and borrowing costs are already higher. Still, officials worry that rising energy prices will become embedded in core inflation and push them to act.

Fed pricing lags. The futures market assigns only a 40% probability to two Fed rate hikes. That gap between the ECB and the Fed supports euro-dollar bulls.

Markets have shifted focus from central bank divergence to crude oil supply dynamics. Brent has stabilized above $76 a barrel. Traffic through the Strait of Hormuz has dropped to 25 tankers per day from a typical 30 to 50. Hopes for talks between the U.S. and Iran have kept prices from climbing further.

The dollar's weakness let sellers reenter dollar-yen. Japan Finance Minister Satsuki Katayama amplified the move by calling on pension funds, including the Government Pension Investment Fund, to increase allocations to domestic assets. Traders said the statement carried more weight than recent verbal intervention and accelerated the yen's gains against the dollar.