The U.S. dollar approached its lowest levels in six weeks on Wednesday, giving up most of the gains it achieved since the outbreak of the war with Iran, amid signs of the potential resumption of a new round of talks between Washington and Tehran, which boosted investor risk appetite.

Since the start of the war between the United States and Israel on one side and Iran on the other on February 28, Tehran has effectively closed the Strait of Hormuz, a vital waterway through which about one-fifth of global oil and gas shipments pass, leading to a sharp rise in energy prices and increased concerns regarding the impact on global growth and inflation.

Washington imposed a blockade on Iranian ports after the collapse of weekend talks, but U.S. President Donald Trump said on Tuesday that talks to end the war may resume in Pakistan within the coming days, which contributed to strengthening investor confidence and reducing demand for the dollar as a safe haven.

Regarding other currencies, the euro declined slightly by 0.1% to $1.177, near its highest levels since March 2, and the British pound also fell slightly to $1.355.

As for the dollar index, which measures the performance of the American currency against a basket of six major currencies, it returned to its level at the end of February, after having risen by about 3% in early March.

Although the talks that took place in Islamabad last weekend did not yield a breakthrough, raising doubts about the sustainability of a two-week truce that still has one week remaining, investors still hold onto hopes that diplomatic efforts will lead to a solution.

The dollar had benefited significantly from safe-haven flows in March; however, optimism regarding the ceasefire and the possibility of reaching a settlement pushed it to decline by about 2% this month against major currencies.

With the continuation of the state of uncertainty, Lee Hardman, currency strategist at MUFG Bank, warned against rushing to bet on a further decline of the dollar, noting that markets may be overly optimistic about a quick return to normalcy.

He added that there is a risk that markets are underestimating the scale of the energy price shock and its potential impact on the global economy.

Investors are currently focusing on the extent of the damage that may befall the global economy due to the energy shock, especially with physical oil prices trading above $140 per barrel, although futures contracts have returned to below $100.

The International Monetary Fund had lowered its global growth forecasts due to rising energy prices, warning that the world is already heading toward a more negative scenario with a sharper slowdown in growth.

In the worst-case scenarios, the Fund sees the global economy approaching the brink of recession, with average oil prices reaching $110 per barrel in 2026 and $125 in 2027.

On the other hand, the Japanese yen declined by 0.14% to 158.95 against the dollar, and it remains below its pre-war levels, affected by the rising costs of imported energy.

The rise in oil and natural gas prices also led markets to price in the possibility of both the European Central Bank and the Bank of England raising interest rates this year to curb inflation, while even a single interest rate cut by the Federal Reserve has become a matter of doubt.

Former U.S. Treasury Secretary Janet Yellen considered that one interest rate cut by the Fed is still possible this year, despite inflationary pressures resulting from supply shocks associated with the war, noting that the central bank will continue to closely monitor inflation expectations while keeping its options open.