US Dollar Retreats as Hopes Grow for Middle East De-escalation
The U.S. dollar weakened on Wednesday, retreating from the multi-month highs reached in the previous session, as investors reduced safe-haven exposure amid rising expectations that the Middle East conflict could be shorter than initially feared.
Market sentiment improved after a New York Times report suggested that Iran’s Ministry of Intelligence had signalled to the U.S. Central Intelligence Agency its willingness to explore negotiations aimed at ending the conflict. The report, which cited officials familiar with the matter, encouraged investors to move back into riskier assets and put downward pressure on the dollar.
According to Karl Schamotta, chief market strategist at Corpay in Toronto, traders are beginning to see signs that tensions in the region could ease.
“Investors are seeing light at the end of the tunnel for the conflict in the Middle East and are unwinding short positions on currencies that are most vulnerable to a prolonged commodity price shock,” he explained.
Schamotta also noted that back-channel communications between U.S. and Iranian intelligence agencies, combined with President Donald Trump’s apparent retreat from earlier calls for regime change, have lowered the perceived risk of a broader regional conflict.
Euro and Dollar Index Move as Markets Adjust
During mid-morning trading, the euro rose 0.1% to $1.1623, recovering slightly after hitting its weakest level since late November in the previous session. The move followed eurozone inflation data released on Tuesday, which showed consumer prices rising faster than expected in February, before the escalation of tensions involving Iran.
Meanwhile, the U.S. dollar index, which measures the greenback against six major currencies, fell 0.1% to 98.93 after earlier touching its strongest level since November 28.
Against the Japanese yen, the dollar dropped 0.3% to 157.25. On Tuesday, the U.S. currency had climbed to its highest level since January 23, when the New York Federal Reserve reportedly conducted rate checks on the dollar-yen pair.
Strong U.S. Data Takes Back Seat to Geopolitics
Despite several notable economic releases, currency markets largely ignored U.S. economic data as investors focused on developments in the Middle East.
Figures showed that U.S. private payrolls increased by 63,000 jobs in February, marking the strongest rise in seven months. However, the previous month’s data was revised sharply lower, showing only 11,000 jobs added in January.
Another report indicated that U.S. services sector activity surged to a more than three-and-a-half-year high. The Institute for Supply Management’s non-manufacturing PMI climbed to 56.1 in February, the strongest reading since July 2022, compared with 53.8 in January. Economists surveyed by Reuters had expected the index to decline slightly to 53.5.
Even with these positive indicators, geopolitical developments remained the dominant driver of currency movements.
Options Market Signals Growing Bearishness on the Euro
In the foreign exchange options market, traders are becoming increasingly pessimistic about the euro. Positioning data shows investors are more bearish on the single currency than at any time in at least a year, marking a dramatic shift from the strongly bullish outlook seen just six weeks earlier.
Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets, said that European energy prices are a major concern for the region’s currency.
“In Europe, everything revolves around natural gas prices. If supply disruptions or price spikes intensify, it could become a significant problem for the eurozone,” he said.
According to data from LSEG, the cost of buying options that profit from a decline in the euro against the dollar over the next three months has reached its largest premium since March last year, reflecting expectations that the euro may continue to weaken.
Energy Prices Could Push the Euro Lower
George Saravelos, global head of FX research at Deutsche Bank, highlighted the sensitivity of the euro to rising energy costs.
He estimated that every combined 10% increase in Brent crude oil and European natural gas prices typically leads to about a 0.8% decline in the euro.
Saravelos added that if Brent crude and natural gas futures both climbed toward $100, the EUR/USD exchange rate could fall to around $1.13, based on current market sensitivities.
Energy markets have been volatile after strikes on Iran disrupted exports across the Middle East. Iranian attacks on ships and energy infrastructure have forced navigation closures in the Gulf and triggered production stoppages from Qatar to Iraq, pushing global energy prices higher.
At the latest check, U.S. crude futures were trading 0.3% higher at $74.81 per barrel.
Pound, Yuan and Bitcoin Also React to Market Shifts
Elsewhere in the currency markets, the British pound edged slightly higher to $1.3363, after touching its lowest level since December a day earlier. Sterling has been pressured by concerns that rising energy costs could keep U.K. inflation elevated, with inflation currently running at 3%, well above the Bank of England’s 2% target.
Against the Chinese yuan, the U.S. dollar declined 0.2% to 6.9008 in offshore trading. The move followed mixed February PMI data from China, where official surveys showed slowing activity while private-sector gauges exceeded expectations.
In the cryptocurrency market, Bitcoin rebounded alongside other risk-sensitive assets, climbing to a one-month high. The digital currency was last trading around $72,182, up roughly 6% on the day.
