The US dollar fell to its lowest level in six weeks during trading on Wednesday, after losing most of the gains it had made since the outbreak of the war with Iran, amid indications that a new round of talks between Washington and Tehran might resume.
The de facto closure of the Strait of Hormuz by Tehran since the start of the war on February 28 has caused major disruption to global energy flows, as about one-fifth of the world’s oil and gas supplies pass through this waterway, causing a sharp rise in prices and increased concerns about global growth and inflation.
In this context, the United States imposed a blockade on Iranian ports after the failure of weekend negotiations, but statements by US President Donald Trump regarding the possibility of resuming talks in the coming days helped to support investor confidence and reduce demand for the dollar as a safe haven.
Major currency movements amid market volatility
The euro stabilized near its highest level since March 2 at around $1.1786, having recovered from losses suffered during the war.
The British pound also stabilized at $1.356, amid relatively calm currency movements.
The dollar index, which measures the performance of the US currency against a basket of six major currencies, has returned to the levels it was at when the war broke out, after having risen by about 3% in early March.
Cautious optimism despite stalled negotiations
Talks in Islamabad over the weekend failed to achieve any breakthrough, raising doubts about the sustainability of the two-week ceasefire, but investors remain hopeful that the diplomatic track can succeed.
The dollar benefited in March from safe-haven flows, but has fallen by about 2% this month as optimism grows about reaching an agreement and easing tensions.
In this context, Lee Hardman, currency strategist at MUFG Bank, pointed out that the high level of uncertainty makes it premature to consider the dollar's appeal as a safe haven to be over.
Hardman explained that markets may be overly optimistic about improving conditions, warning against underestimating the impact of the energy price shock on the global economy.
Investors are currently focused on the extent of the damage that this shock could inflict on the global economy, especially with actual oil prices rising above $140 a barrel, despite futures contracts falling below $100.
In this context, the International Monetary Fund lowered its global growth forecasts due to rising energy prices resulting from the war, indicating that the global economy is already heading towards a more negative scenario with slowing growth.
Grim scenarios and central bank actions
In the worst-case scenario, estimates suggest the global economy is nearing recession, with average oil prices expected to reach $110 in 2026 and $125 in 2027.
The Japanese yen fell 0.13% to 158.95 against the dollar, affected by rising imported energy costs that are putting pressure on the Japanese economy.
Conversely, the surge in oil and gas prices has led traders to anticipate that the European Central Bank and the Bank of England may raise interest rates this year to control inflation, while the prospects for a US interest rate cut have become less clear.
Federal Reserve forecasts between inflation and pressures
Former US Treasury Secretary Janet Yellen believes that one more interest rate cut by the Federal Reserve is still possible this year, despite inflationary pressures resulting from supply disruptions.
Yellen noted that short-term inflation expectations had risen slightly, but stressed that monetary policymakers would be monitoring the situation closely before making any decisions.
Given these circumstances, global markets remain caught between cautious optimism about the possibility of a political solution and genuine fears about the repercussions of the energy shock on economic growth and stability.
