Oil prices plunged 16%, and even the US dollar couldn't hold up, at one point giving back all its gains for the year.

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The US-Iran ceasefire agreement suppresses oil prices, causing a sharp drop in safe-haven demand for the US dollar.

On Wednesday, after the news of a two-week ceasefire between the US and Iran was announced, Brent crude oil futures plunged 16%, marking the biggest single-day drop in nearly six years, before rebounding somewhat.

The decline in risk aversion led the US dollar index to similarly come under pressure. The ICE Dollar Index once plummeted 1.2%, erasing all gains for the year. Bloomberg's Dollar Spot Index fell 0.8%, marking its worst single-day performance since January this year.

The US dollar fell across the board against 16 major currencies, with the euro, pound, and yen all rising by over 1% intraday.

However, according to CCTV News, on the 8th local time, the Strait of Hormuz was once again closed. Previous reports indicated that after Israel attacked Lebanon, Iran suspended the passage of oil tankers through the Strait of Hormuz. The gains in risk assets retreated somewhat, and the dollar rebounded 0.6% from its daily low.

Ceasefire triggers rapid unwinding of long positions

The news of a two-week ceasefire between the US and Iran quickly led the market to reprice the easing of tensions in the Middle East.

The previous strength of the US dollar partly stemmed from its status as a relatively safe asset and the belief that the US economy is better equipped to withstand global energy shocks.

Leah Traub, portfolio manager at Lord Abbett & Co., stated:

This is a purely relief-driven rebound, especially after the escalation early last week. Given the disproportionate negative impact of war and energy price shocks outside the US, it is completely logical for non-US markets’ rebound to be stronger.

Market participants pointed out that Wednesday’s rapid fluctuations in the FX market partly reflected traders unwinding long dollar positions, while fundamental assessments among investors have not shifted radically.

Citi's FX strategy team wrote in Wednesday's report:

Anchored by the two-week ceasefire, leveraged investors are more inclined to re-enter the market with off-the-books funds. This setup makes us not in a hurry to buy the dollar on dips for now.

Rate cut expectations rekindled, but uncertainties remain

Another driver behind the dollar’s weakness is the readjustment of Fed policy expectations.

During the Middle East conflict, surging energy prices reignited inflation concerns and sharply reduced market expectations for Fed rate cuts.

With oil prices retreating, the market's expectations for the ECB and Bank of England to raise rates this year have significantly fallen, and bets on the Fed cutting rates in 2026 have revived. Current market pricing shows about a 33% chance for a rate cut this year.

Analysts pointed out that if the decline in oil prices continues, expectations of rate cuts could further heat up.

Changes in sentiment in the FX options market confirm this shift.

The indicator for the expected volatility of a basket of currencies against the dollar over the next month has fallen to its lowest level since the outbreak of the conflict. Option markets show that traders’ bullish sentiment towards the dollar has sharply contracted over the same period.

According to Bloomberg’s compilation of DTCC options trade data, Wednesday’s options trading volume was about 11% higher than the recent average, with especially active trading in the euro and pound.

The sustainability of the Hormuz corridor is a key variable

The core focus of the ceasefire agreement is the guarantee of passage through the Strait of Hormuz.

Andrew Hazlett, FX trader at Monex Inc., noted:

The ceasefire news and easing energy crisis concerns have put significant pressure on the dollar. The key question over the coming days will be: To what degree has shipping in Hormuz recovered, and can this lead to a sustained de-escalation?

Bloomberg macro strategist Skylar Montgomery Koning also pointed out that Brent crude oil has currently only given back about half of its previous gains, and the dollar’s decline has slightly exceeded the range supported by commodity signals.

She said that longer-term forex trends will depend on how much substantive damage the earlier shock has caused to the economy.

Although market sentiment has clearly improved, doubts remain about the stability of the ceasefire agreement.

On Wednesday, maritime tracking systems showed that the oil tanker “AUROURA,” which was heading toward the exit of the Strait of Hormuz, suddenly changed course near the Musandam Peninsula in Oman, and after a 180-degree turn, returned to the depths of the Persian Gulf.

Fighting has not completely ceased in the Middle East, and the Strait of Hormuz remains blocked. This highlights the fragility of the agreement and means that if tensions flare up again, the dollar’s decline could quickly reverse. XTB research director Kathleen Brooks said:

Although there are reasons to stay cautious, the scale of market volatility has been impressive. This remains a news-driven market, and any sign that the ceasefire agreement is threatened could trigger renewed intense volatility.

Risk Warning and DisclaimerThe market carries risks; investment requires caution. This article does not constitute personal investment advice and does not take into account individual users’ particular investment goals, financial situations, or needs. Users should consider whether any opinions, views, or conclusions in this article fit their particular circumstances. Invest accordingly and at your own risk. ```