The dollar index (DXY00) spent most of the day lower on Tuesday, then rebounded slightly in the afternoon, ending little changed. The dollar came under pressure from Tuesday’s nearly -12% plunge in oil prices, which was bearish for Fed policy. However, the dollar had fundamental support from a +5.6 bp rise in the 10-year T-note yield.
Tuesday’s current home sales report was supportive of the dollar. US February home sales rose 1.7% m/m to 4.09 million, stronger than expectations for a decline to 3.88 million.
An Iranian drone strike on Tuesday caused operations to be halted due to a fire at the largest refinery in the UAE’s Roiss Industrial Complex. Also, Iran’s semi-official Mehr news agency reported the explosion of a tanker near Abu Dhabi, but did not reveal any other details.
Despite these setbacks, April WTI crude oil futures prices fell nearly -12% on Tuesday, erasing part of the sharp rally seen over the past 1-1/2 weeks. Oil prices rose to $119 a barrel on Monday after Israel bombed 30 Iranian oil depots. However, WTI oil prices fell after President Trump said on Monday that the war with Iran was “substantially” over after G-7 finance ministers said on Monday that G-7 countries were ready to release oil reserves if needed. Asked at a press conference on Monday evening when the war would end, President Trump replied, “I think very soon.”
Iran has not shown any sign of backing down despite the air campaign launched by Israel and the US. Iran’s Council of Experts this weekend elected hardliner Mojtaba Khamenei, the son of Ayatollah Ali Khamenei, as Iran’s new Supreme Leader. Iran’s new leader has close ties to Iran’s powerful Islamic Revolutionary Guard Corps (IRGC).
Exchange markets are discounting odds at 0% for a -25 bp rate cut at the next FOMC policy meeting on March 17-18.
The dollar continues to decline due to a weak outlook for interest rate differentials, with the FOMC expected to cut interest rates by at least -25 bp in 2026, while the BOJ and ECB are expected to raise rates by at least +25 bp in 2026.
