The US dollar edged lower on Tuesday as investors shifted their focus to central bank meetings amid uncertainty surrounding the war in the Middle East and oil price expectations.

Crude oil futures remained above the $100 per barrel level, supported by supply concerns as the Strait of Hormuz remains largely closed, despite a pullback in the previous session after some vessels passed through the vital waterway.

Mohit Kumar, economist at Jefferies, said that if Iran allows ships bound for India, China, and South Asia to pass, this could significantly ease supply pressures.

The US dollar index, which measures the currency against a basket of six major currencies, fell 0.10% to 99.75 points, after reaching 100.54 on Friday, its highest level since May 2025, as investors turned to safe-haven assets while currencies such as the euro and yen were more exposed to the impact of rising oil prices.

Bhanu Baweja, strategist at UBS, estimated that oil prices could reach $120 if the Strait of Hormuz remains closed until the end of March, and $150 if the closure continues until the end of April.

In an escalation of tensions, a senior Iranian official said the new Supreme Leader rejected de-escalation proposals conveyed by mediators, demanding that the United States and Israel be subdued first.

Market focus on central bank response

Investors are now questioning whether global economies are returning to conditions similar to 2022, when central banks launched an aggressive tightening cycle.

The US Federal Reserve is scheduled to announce its monetary policy decision on Wednesday, followed by the European Central Bank, the Bank of England, and the Bank of Japan the next day.

These banks are widely expected to keep interest rates unchanged, but investors will focus on any signals regarding how policymakers plan to deal with the impact of the war in the Middle East.

Antje Praefcke, currency analyst at Commerzbank, said she believes central banks will closely monitor inflation expectations as a lesson from the previous price shock, adding that they may move more quickly compared to the period following the coronavirus pandemic.

Market pricing currently suggests expectations of about two interest rate hikes by the European Central Bank in 2026, a major shift from earlier expectations that pointed to potential rate cuts. Expectations for Federal Reserve rate cuts have also been reduced, with markets now pricing only about a 25-basis-point cut this year.

Paul Mackel, head of global FX research at HSBC, said the situation is different from 2022 at the start of the Russia-Ukraine war, noting that the dollar was then supported by additional factors such as US monetary tightening and weak global growth, which are currently absent.

Major currency moves

The euro rose 0.1% to $1.1515 after falling to $1.1409 on Monday, its lowest level since August 2025. Mackel expects the euro/dollar pair to trade in a range between 1.10 and 1.12 if energy supply constraints in the Gulf persist.

In Germany, investor sentiment declined more than expected in March, recording its largest drop since February 2022.

The Japanese yen rose to 159.03 against the dollar, approaching the key 160 level despite verbal warnings from Japanese authorities, after falling more than 2% since the outbreak of the war at the end of February.

Bank of Japan Governor Kazuo Ueda said core inflation is accelerating toward the banks 2% target, stressing that price increases must be accompanied by strong wage growth.

Barclays analysts believe that continued high oil prices, a prolonged closure of the Strait of Hormuz, and an accommodative monetary stance by the Bank of Japan could push the dollar/yen pair to test the 160 level and then the intervention zone seen in 2024 around 161.

Japanese Finance Minister Satsuki Katayama confirmed that the government is ready to take decisive action to address volatility in foreign exchange and financial markets.

Meanwhile, the Australian dollar rose 0.2% to $0.7086 after the Reserve Bank of Australia raised interest rates in a closely split vote.