Dollar Slips as Trump Signals Iran Deal Hopes

The US dollar extended its decline after Donald Trump said Iran is seeking a deal. Investors have seen this pattern before: escalation followed by de-escalation, each time the president signals openness to talks. The S&P 500 rose. Brent crude pulled back from local highs. Treasury yields fell. Those three moves together are weighing on the dollar index.

The oil rally had revived the prospect of monetary tightening in Europe. The futures market now puts the probability of two ECB and Bank of England rate hikes in 2026 at 50%. It sees a 90% chance the ECB will raise its deposit rate in September. The minutes of the ECB's June meeting noted that inflation would stay above the 2% target through the first half of 2027, even with three rate increases by then.

The ECB faced heavy criticism for moving too slowly on rates in 2022 as consumer prices surged. It does not want to repeat that mistake, though the situation is different now: the eurozone economy is weaker and borrowing costs are already higher. Still, fears that rising energy prices will embed in core inflation are pushing the central bank toward action.

The futures market prices only a 40% probability of two Fed rate hikes, lower than for the ECB. That gap has helped EURUSD hold its gains. The market is focusing on TACO – the risk of a broader conflict – rather than central bank moves alone. Brent has stabilised above $76 a barrel. Traffic through the Strait of Hormuz has slowed sharply, with the number of tankers passing through falling to 25 from a typical 30–50 in recent days. Hopes for US-Iran talks are keeping oil from climbing further.

The dollar's weakness allowed USDJPY bears to mount a counterattack. Finance Minister Satsuki Katayama added to the pressure. Her call for pension funds, including the GPIF, to increase investments in Japanese assets proved more effective than verbal intervention on the currency itself.