Dollar Slides on Iran Deal Hopes, ECB Tightening Bets

The dollar fell on Monday after Donald Trump said Iran is seeking a deal, extending a retreat that began last week. The S&P 500 rose and Brent crude pulled back from local highs. Treasury yields slipped, pressuring the dollar.

The oil rally has revived bets on European central bank tightening. Futures markets now price a 50% probability that the ECB and the Bank of England will each raise rates twice in 2026. The chance of an ECB deposit rate hike in September stands at 90%, according to swaps. Minutes from the ECB's June meeting showed policymakers expect inflation to stay above the 2% target through the first half of 2027 even with three rate increases by then.

The ECB faced criticism in 2022 for acting too slowly as inflation surged. Policymakers are wary of repeating that mistake, though the economy is weaker and borrowing costs are higher than four years ago. Fears that rising energy prices could become embedded in core inflation are pushing the ECB toward action, traders said.

The Fed, by contrast, has a lower probability of tightening. Futures price only a 40% chance of two rate hikes, below the ECB's implied path. That differential boosted EUR/USD. The dollar weakened.

Brent crude held above $76 a barrel. Traffic through the Strait of Hormuz has slowed, with tanker passages dropping to 25 from a typical 30-50 in recent days. Hopes for US-Iran talks have capped further gains, traders said.

USD/JPY fell. The dollar weakened. Finance Minister Satsuki Katayama called on pension funds, including the GPIF, to increase allocations to Japanese assets. The comment added to the yen's strength, traders said.