The US Dollar Index (DXY) extended its decline, slipping below 98.00 and trading around 97.85–97.90 during the Asian session on Thursday, marking its lowest level in over six weeks as optimism grew for a potential de-escalation in the Middle East conflict [3][4]. US President Donald Trump stated that the war was 'close to over,' and Bloomberg reported speculation about a possible two-week extension of a ceasefire, though Trump downplayed the necessity of such a move, citing ongoing negotiations aimed at ending the conflict [1][3][5]. The Strait of Hormuz remains effectively closed under a dual blockade, but Tehran may allow vessels to pass through the Omani side if an agreement is reached to prevent renewed hostilities [1][3].
This improved risk sentiment led to broad-based US Dollar weakness, with the USD falling 0.15% on the day and underperforming against all major currencies, most notably the Australian Dollar [4]. The USD/CHF pair dropped 0.2% to near 0.7800, while EUR/CAD held losses near 1.6200 as the Canadian Dollar gained on the risk-on mood [1][4]. The NZD/USD pair remained stronger above 0.5900, supported by both the weaker USD and robust Chinese Q1 GDP data, which showed 1.3% quarter-over-quarter and 5.0% year-over-year growth, exceeding expectations [5].
Market participants have priced out the possibility of further Federal Reserve interest rate hikes this year, as easing energy prices have helped alleviate inflation concerns [3][4][5]. The Fed is widely anticipated to keep rates unchanged at its upcoming meeting and possibly for the rest of the year [3][4][5]. Beth Hammack noted that the key factor to monitor is how high energy prices rise and how long they remain elevated, while Alberto Musalem stated that the oil shock from the Middle East conflict is likely feeding into core inflation, with expectations that it will remain near 3% throughout the year [3].
In Europe, the ECB is expected to keep rates unchanged at its April meeting, with President Christine Lagarde emphasizing the need for agility and no bias toward tightening, though traders are still pricing in two quarter-point hikes this year [1]. In Japan, the Yen strengthened against the Euro amid intervention fears, with Finance Minister Satsuki Katayama urging the G7 to closely monitor forex moves. The Bank of Japan is expected to raise its benchmark rate to 1.00% by end-June, with a hike in April or June seen as equally likely due to uncertainty over the Iran war [2].
Overall, the market reaction has been characterized by a shift away from safe-haven assets like the US Dollar and Swiss Franc, and toward risk-sensitive currencies such as the Canadian, New Zealand, and Australian Dollars, as well as a stronger Japanese Yen on intervention speculation [1][2][3][4][5].
CONCLUSION
The US Dollar's sharp decline reflects growing optimism for a Middle East ceasefire and easing energy prices, which have reduced expectations for further Fed tightening. Risk-sensitive currencies have benefited, while safe-haven demand has faded. Central banks in the US, Eurozone, and Japan are expected to maintain or cautiously adjust policy as markets await further developments in geopolitical tensions and inflation trends.