FX Alert: Back From the Brink

Takeaways

• The ceasefire triggers a mechanical unwind of oil and dollar strength, with curves bull steepening and risk assets rebounding
• The next two weeks are critical as markets shift from pricing disruption to assessing the credibility of negotiations and flow through Hormuz
• The dollar’s prior underperformance at peak stress is now being exposed, but structural downside still requires clearer resolution on energy and geopolitics

Back From the Brink

The market didn’t just bounce; it reset its footing. A two-week ceasefire has pulled price action back from the edge and replaced immediacy with a defined window, and in this market, time is the most valuable currency. Oil has led the adjustment, with Brent down around 16% as the risk premium built on disruption begins to unwind. Equities are firmer, yield curves are starting to bull steepen as front-end pressure eases, and the dollar is on the back foot as the oil bid fades. The reopening signal in the Strait of Hormuz shifts the market from a trading blockage to tracking flows, and that transition is driving this broad risk repricing.

But this is not a resolution; it is a test phase. The next two weeks will be telling. Markets are now moving from pricing outcomes to pricing probabilities around a fragile negotiation framework. The 10-point proposal may have created a bridge, but it is not yet a foundation. Questions sit everywhere beneath the surface. Who is truly negotiating for Iran, and does the regime have the cohesion to deliver on any agreement? How aligned are regional players when Israel’s stance still carries visible fault lines, particularly with Lebanon left outside the framework? And perhaps most critically for markets, how quickly and how fully does tanker traffic normalize through the Strait of Hormuz? Flow returning in size would continue to weigh on oil and further unwind the stagflation trade, but any hesitation or bottleneck keeps the clock ticking and the risk premium partially intact.

What we are seeing in markets is a clean mechanical unwind of March extremes, not a wholesale regime shift. That period was defined by energy-driven inflation fears, a violent flattening of yield curves, and broad-based dollar strength as capital sought shelter. Now, with crude easing and passage reopening, those trades are being pared back. FX is responding in kind, with high-beta currencies leading the rebound and retracing a meaningful portion of their prior losses, while the dollar gives back ground more as a function of positioning than of conviction. After moves of 2 to 5 percent lower across many currencies last month, a move toward a 50 percent retracement looks like a natural first stop in this adjustment.

Yet beneath that relief, the policy layer is not relaxing. Inflation has already been seeded into the system, and central banks are beginning to acknowledge that second-round effects remain a live risk. The Reserve Bank of New Zealand’s shift toward a more hawkish stance is unlikely to be an isolated move. This is why the front end is easing but not collapsing. The market is removing the immediacy of the shock, not the persistence of the inflation impulse. That keeps the curve steepening in bull fashion, but stops it from normalizing outright.

For the dollar, this is a bearish turn in the short term, but not a structural breakdown just yet. The March rally was built on energy, rates, and uncertainty. One of those pillars has softened, but the others remain in play.

The dollar never quite wore the crown it was handed. Even at peak tension, it struggled to fully capitalize, with USD/JPY only marginally probing above 160 and EUR/USD barely stretching through 1.1500 despite a backdrop that, on paper, should have delivered a far more forceful bid. That hesitation was a tell. Beneath the surface, demand for the dollar looked thinner than the headlines implied, suggesting that a degree of policy distrust out of Washington was already seeping into the tape.

That underperformance now matters. Throughout this conflict, the dollar has lagged what you would typically expect given the scale of the energy shock and the inflation impulse it carried. With the ceasefire in place and the prospect of a negotiated outcome on the table, that asymmetry is beginning to unwind. In the short term, this sets up for further dollar weakness as the war premium is stripped out and positioning adjusts to a less acute risk backdrop.

Looking further out, the bigger risk for the dollar is narrative, not just flow. If Washington walks away from this episode with the Iranian regime still firmly in control and able to frame the outcome as a strategic win, it raises broader questions around US policy effectiveness. Markets are quick to internalize that kind of signal. Should that perception take hold, it opens the door to a deeper reassessment of US asset confidence, and with it, a sharper leg lower in the dollar beyond the immediate unwind phase.