The US Dollar (USD) experienced broad-based weakness on Wednesday, driven by a combination of geopolitical developments, central bank commentary, and shifting market expectations. USD/JPY traded around 158.50, down 0.14% on the day and touching a one-week low near 158.27, as hopes for de-escalation in the US-Iran conflict reduced demand for the safe-haven Dollar and improved global risk sentiment [1]. US President Donald Trump stated that hostilities with Tehran could wind down within two to three weeks, which further boosted risk appetite and weighed on the USD [1][3]. Trump also indicated that the Strait of Hormuz would reopen 'automatically' and is scheduled to address the nation at 01:00 GMT on Thursday with an important update on Iran [3].
The USD's weakness was also evident in other currency pairs, with USD/CHF sliding below 0.7930 to session lows of 0.7925, extending its reversal from highs above 0.8040 the previous day [3]. The Dollar was the strongest against the Canadian Dollar according to one source [1], but another source reported it was strongest against the Japanese Yen [3], highlighting a discrepancy in the day's relative performance tables.
On the policy front, Rabobank noted that US Treasury yields have fallen for two consecutive sessions after Fed Chair Powell downplayed the need for further rate hikes, emphasizing that tariffs have a one-time impact on inflation and that there are risks on both sides of the Fed's mandate [4]. This dovish tone, combined with a sharp shift in Fed OIS pricing from modest hikes to expected cuts by 2026, pressured the Dollar further, with the DXY Index closing down 0.65% below the 100-handle for the first time since Friday [4]. EUR/USD closed up 0.80% to 1.15, reflecting pronounced Dollar softness, though some of the move may have been influenced by end-of-quarter rebalancing flows [4].
Analysts at MUFG warned that while risk sentiment has improved on hopes of a quick end to the US-Iran conflict, the recovery is fragile due to ongoing geopolitical uncertainty, energy supply doubts, rising US fiscal and inflation risks, and declining foreign holdings of Treasuries [2]. MUFG expects the Dollar to remain vulnerable and forecasts a resumption of the depreciation trend once the conflict ends, as confidence in US assets could be further undermined [2].
Japanese economic data also played a role, with the Bank of Japan's Tankan survey showing sentiment among large manufacturers rising to 17, its highest since December 2021, supporting the Yen and reinforcing expectations of gradual BoJ policy normalization [1]. However, BoJ officials cautioned that the survey may not fully reflect the impact of the Middle East war, given Japan's reliance on energy imports from the region [1]. Japanese authorities have reiterated their readiness to intervene in currency markets if JPY volatility becomes excessive [1].
Markets are now focused on upcoming US macroeconomic releases, including the ADP private employment report and ISM Manufacturing PMI, which could influence expectations for the Federal Reserve's policy path ahead of Friday's Nonfarm Payrolls report [1].
CONCLUSION
The US Dollar came under significant pressure due to easing Middle East tensions, dovish Fed signals, and shifting market expectations toward rate cuts. While improved risk sentiment has weakened the Dollar, analysts caution that the recovery is fragile and further depreciation is likely amid ongoing geopolitical and fiscal risks. Market participants are closely watching upcoming US data and official statements for further direction.