The U.S. dollar suffered its steepest decline in weeks on Tuesday following President Donald Trump’s surprise announcement of a comprehensive ceasefire agreement between Israel and Iran, bringing an abrupt end to a 12-day military confrontation that had sent shockwaves through global financial markets and displaced millions of civilians from Tehran.
The breakthrough diplomatic accord, which Israel has accepted after declaring it achieved its objective of neutralizing Iran’s nuclear and ballistic missile capabilities, unleashed a powerful risk-on rally across asset classes. Oil prices plummeted as investors unwound war premium positions, while safe-haven currencies gave way to higher-yielding alternatives as geopolitical tensions that had gripped markets for nearly two weeks began to dissipate.
Currency Markets in Upheaval
The dollar’s retreat was swift and broad-based, falling 0.75% against the Japanese yen to 145.03 and losing ground to the euro, which climbed 0.27% to $1.1609. The European single currency had touched $1.1632 just weeks earlier—its strongest level since October 2021—as energy-dependent economies in Europe and Japan stood to benefit most from the dramatic collapse in crude oil prices.
The dollar index, which measures the greenback against a basket of major trading partners’ currencies, declined 0.14% to 98.09, extending losses from the previous session, where it had already shed more than half a percentage point.
Fed Policy Pivot Adds Pressure
Compounding the dollar’s woes were increasingly dovish signals from Federal Reserve officials, with policymaker Michelle Bowman suggesting the central bank should consider interest rate cuts in the near term. Her comments, coupled with similar remarks from Fed Governor Christopher Waller last week about potential easing at next month’s meeting, sent U.S. Treasury yields tumbling and further undermined the dollar’s strength.
The shift in Fed rhetoric gained additional momentum from an unexpected source: President Trump himself, who declared Tuesday that U.S. interest rates should be reduced by “at least two to three percentage points”—a remarkably aggressive stance that caught markets off guard.
Money markets responded immediately, with traders now pricing in a 23% probability of a July rate cut, up from just 14.5% a day earlier, according to the CME FedWatch tool. However, not all analysts are convinced the Fed will move so quickly.
“We are not in the July camp, but do believe that data should show signs of weakness over the summer months and hence prompt a rate cut in September,” said Mohit Kumar, economist at Jefferies, suggesting a more measured approach from the central bank.
Risk Assets Surge on Ceasefire News
The announcement triggered a broad-based rally in risk-sensitive assets. The Australian dollar, often seen as a barometer of global risk appetite, surged 0.7% to $0.6506, while New Zealand’s currency jumped 0.75% to $0.6025. Israel’s shekel experienced perhaps the most dramatic move, rocketing 1.5% against the dollar to reach its strongest level since February 2023.
Cryptocurrency markets also participated in the risk rally, with Bitcoin advancing 2% to $105,832 and Ethereum posting an even stronger 3.2% gain to $2,425, reflecting the improved appetite for speculative assets.
Cautious Optimism Amid Uncertainty
Despite the market euphoria, currency strategists emphasized that significant questions remain about the durability of the ceasefire arrangement. “It’s positive news for risk sentiment,” noted Rodrigo Catril, senior currency strategist at National Australia Bank. “We need to have a bit more detail in terms of exactly what all this means… I suppose it will be the conditions of the ceasefire, and what are the conditions for a longer-lasting peace deal?”
Fed Chair in Spotlight
All eyes now turn to Federal Reserve Chair Jerome Powell, who is scheduled to testify before Congress on Tuesday and Wednesday. His remarks will be closely scrutinized for clues about the central bank’s policy trajectory, particularly given the recent dovish comments from his colleagues and the president’s public pressure for aggressive rate cuts.
The convergence of geopolitical relief and monetary policy speculation has created a perfect storm for dollar weakness, with traders positioning for a potentially significant shift in the global financial landscape as markets attempt to price in both the immediate benefits of reduced Middle East tensions and the longer-term implications of a more accommodative Federal Reserve.
WHAT YOU SHOULD KNOW
The U.S. dollar fell sharply after President Trump announced a ceasefire between Israel and Iran, ending a 12-day conflict that had rattled global markets. This geopolitical breakthrough, combined with growing expectations that the Federal Reserve will soon cut interest rates, triggered a broad “risk-on” rally, where investors shifted away from safe-haven assets like the dollar toward higher-risk investments.
Oil prices plummeted, benefiting energy-importing currencies like the euro and yen, while risk assets, including cryptocurrencies and commodity currencies, surged. The market shift reflects reduced Middle East tensions and anticipation of looser U.S. monetary policy, with traders now pricing in a 23% chance of Fed rate cuts as early as July.
