A Deutsche Bank analyst said the dollar has more broadly “lost its exceptionalism” as a safe-haven asset.
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The U.S. dollar lacked a clear direction on Tuesday as investors shifted their focus to central bank meetings, amid uncertainty about the conflict in the Middle East and the oil price outlook.
The Middle East conflict and its economic impact remained in the spotlight with oil prices above $100 a barrel on worries about supply with the Strait of Hormuz mostly shut. Crude futures dropped in the previous session after some vessels sailed through the critical waterway.
“If Iran allows ships destined for India, China and South Asia that could significantly reduce the pressure on supply,” said Mohit Kumar, an economist at Jefferies.
“At the same time Iran can claim to retain control of the Strait traffic.” Iran launched fresh attacks on the United Arab Emirates on Tuesday, the kind of strikes on U.S. Gulf allies that President Donald Trump said had not been expected.
Central banks response in focus
Investors are now wondering whether economies are returning to a 2022-style environment, when central banks launched a major tightening cycle.
The Fed will announce its policy decision on Wednesday, with the European Central Bank, the Bank of England and the Bank of Japan following a day later.
They are all expected to keep rates unchanged, but investors will focus on any clues as to how policymakers might respond to the war in the Middle East.
“I think central banks will closely monitor the development of inflation expectations as a lesson from the previous price shock,” said Antje Praefcke, forex analyst at Commerzbank.
“And they may also react more quickly than they did after the pandemic,” she added.
Traders are pricing in almost two European Central Bank rate hikes in 2026, a sharp shift from the roughly 50% chance of a cut seen before the conflict began. “It is a different environment from 2022, with the Russia-Ukraine war beginning,” said Paul Mackel, global head of forex research at HSBC.
“The U.S. dollar had other supportive drivers, including a hawkish Federal Reserve and weaker global growth. These are now missing,” he added. The single currency was down 0.15% at $1.1490. On Monday, it reached $1.1409, its lowest level since August 2025.
HSBC’s Mackel sees euro/dollar at a 1.10-1.12 range, if Gulf energy supply restrictions persist.
The U.S. dollar index, which measures the value of the greenback against a basket of six major foreign currencies, was up 0.05% at 99.90. It hit 100.54 on Friday, its highest level since May 2025.
Yen still close to intervention territory
The Japanese yen weakened to 159.31 per dollar, just shy of the crucial 160 level, despite verbal warnings from Japanese authorities. It’s down more than 2% against the dollar since the war began at the end of February.
Bank of Japan Governor Kazuo Ueda said underlying inflation was accelerating towards the bank’s 2% target, stressing that price rises must be matched by solid wage gains.
Further increases in oil prices, a prolonged closure of the Strait of Hormuz and a dovish outcome from this week’s BOJ meeting could see the dollar/yen test 160 and then the 2024 forex intervention zone at 161, according to Barclays.
Japan Finance Minister Satsuki Katayama said on Monday and reiterated on Tuesday the government was prepared to take decisive steps against volatility in foreign exchange and other financial markets.
The Australian dollar was little changed after the country’s central bank raised rates in a close vote.
It was last up 0.05% at 0.7074 after strengthening to 0.7095 earlier in the session.