Dollar Steadies as Iran War Hopes Fade After Fresh U.S. Strikes

The dollar held firm on Tuesday after hopes of a quick peace deal to reopen the Strait of Hormuz were hit by new U.S. military strikes on Iranian targets. U.S. Secretary of State Marco Rubio said on Tuesday that negotiating a deal with Iran could take several days. This followed what Washington called defensive strikes in southern Iran a day earlier.

The prospect of a peace deal had earlier pushed oil below $100 per barrel, lifted emerging-market currencies, and boosted risk sentiment. But the new attacks and caution from Rubio tempered that optimism. The euro eased to $1.163, after rising 0.3% on Monday. The British pound slipped 0.2% to $1.347, having gained 0.6% the previous day. The dollar index edged up to 99.08, after falling 0.3% on Monday.

Charu Chanana, chief investment strategist at Saxo in Singapore, said markets are right to price some optimism because even a path toward reopening the Strait of Hormuz lowers extreme tail risks around oil, inflation, and global growth. But she warned against confusing positive negotiation noise with durable de-escalation. The real test, she said, is whether tankers can move freely, insurance premiums fall, and energy flows normalise.

The yen weakened as the dollar rose 0.2% to 159.21 yen, putting the pair closer to the 160 level where traders watch for possible intervention by Tokyo. Sources have told Reuters that Japan intervened at the end of April to pull the yen away from 160 per dollar. The Australian dollar, a proxy for risk, fell 0.2% to $0.716 after rising 0.6% on Monday.

Treasury yields dropped sharply on Tuesday as U.S. markets returned from a holiday, catching up on a global bond yield decline driven by earlier peace deal hopes. Oil prices clawed back some losses after the U.S. strikes. Brent crude rose 1.5% to $97.76 per barrel, after falling 7% on Monday. Analysts do not see energy prices returning to pre-war levels anytime soon, even if a deal is reached soon, as supply chains will take time to normalise and keep inflation and rate concerns alive.

OCBC strategists said they expect a slow oil unwind, even if prices fall sustainably below $100 per barrel in the second half of 2026. This suggests the dollar's terms of trade support should not fade quickly. They added there is no strong case to be bearish on the dollar, citing resilient U.S. growth and AI-driven inflation pressures that have pushed the Federal Reserve toward a more hawkish stance.