US dollar falls 0.30% as oil surge fails to spur haven demand

The WSJ Dollar Index dropped 0.30% to 96.46 on Tuesday, its largest single-day decline in over a week, as the greenback’s traditional safe-haven status was tested by volatile energy markets and a diplomatic deadline concerning the Iran conflict.

"The DXY dollar index is about 2.5% stronger since the conflict began despite crude gaining close to 60%, a more muted FX response than implied by data in the past," Derek Halpenny, a currency strategist at MUFG Bank, said in a note. Halpenny suggested the modest appreciation highlights that the U.S. economy is on a weaker footing compared to the 2022 inflation shock.

The dollar’s decline marked its second consecutive day of losses, bringing its two-day slide to 0.45%. The move came even as analysts noted factors that should be supportive, including America’s position as a net oil exporter. The DXY dollar index, a separate measure, traded in a volatile range, with different analysts citing levels from 99.808 to 100.02. Elsewhere, Sterling rose 0.3% to $1.3271 on tentative de-escalation hopes, while the Japanese yen remained elevated near 159.69 per dollar.

This dynamic suggests the dollar’s role as the ultimate haven is being questioned, with the current price shock potentially hitting U.S. business sentiment and employment more than expected. While TD Securities expects the Federal Reserve to consider resuming rate cuts in the third quarter of 2026, ING’s Chris Turner argued the dollar should remain in demand unless a ceasefire is reached, seeing the DXY holding a 100.00-100.50 range.

Divergent Analyst Views Shape Outlook

Analysts are split on the dollar's trajectory for the remainder of the year. Strategists at TD Securities believe the dollar’s recent gains will be more limited compared to its slow and steady strength in 2022 following Russia’s invasion of Ukraine. They point to a stronger U.S. economy and a Fed on a rate-hiking path at that time as key differences. The firm projects the dollar will end the year lower as the Fed pivots to easing.

In contrast, analysts at ING and Nomura see continued support for the dollar. ING’s Turner highlighted that elevated energy prices and a "seemingly robust U.S. economy" bolster the greenback. Nomura’s FX research team noted that upward pressure on the USD/JPY pair, which stands in the high 159s, is likely to persist unless geopolitical tensions ease and oil prices correct significantly, potentially testing Japan's willingness to intervene in currency markets.

Sterling and Yen Navigate Geopolitical Crosscurrents

The Iran conflict and its impact on oil prices have become the primary drivers for currencies like the British pound and Japanese yen. With a light U.K. economic calendar, Monex Europe analysts noted that sterling remains sensitive to swings in oil prices and broader market volatility, given the country's reliance on imported energy. This backdrop is expected to keep the Bank of England cautious about raising interest rates, making sterling rallies short-lived as long as haven demand for the dollar persists.

Meanwhile, the yen has consolidated but faces weakening pressure. The ongoing U.S.-Iran conflict and firm crude oil prices have kept the USD/JPY pair elevated. Commerzbank’s Thu Lan Nguyen pointed out that a crucial factor will be whether Iran decides to reopen the Strait of Hormuz, a critical channel for global oil supply. Any de-escalation could see haven currencies like the yen and dollar retreat, while a failure to secure a deal could reinforce their strength.

This article is for informational purposes only and does not constitute investment advice.