Dollar Slips as Iran Signals Hormuz Reopening, Oil Retreats

The dollar retreated on Tuesday, giving back an earlier advance to a near-two-month peak, after oil prices slid on Iran's conditional offer to reopen the Strait of Hormuz within seven days.

The US currency traded 0.12% weaker against the yen at 157.15, while the euro was almost flat at $1.146 and sterling eased 0.09% to $1.3356. The dollar index, which measures the greenback against six major peers, was 0.02% lower at 100.4, having touched its strongest level since late July earlier in the session.

A senior Iranian official said the strait could be reopened within a week if Washington eases military pressure and lifts its blockade of Iranian ports. The disruption at the waterway has tightened global oil supplies and fed inflationary pressure, leaving investors quick to reprice assets at any hint of a change in the outlook.

Brent crude futures fell below $99. A lasting drop in oil prices would ease inflation concerns and reduce the case for higher US interest rates, eroding the dollar's yield advantage over other currencies.

Attention also remained on the yen, as traders assessed whether the Bank of Japan would tighten policy fast enough to narrow the gap with global peers. Even after last week's rate increase, the Japanese currency has stayed under pressure. Two policymakers pushed for a more cautious pace, which investors read as a sign that further hikes could prove difficult.

"Whether the central bank quickens its pace remains contingent on how events unfold. Questions of where neutral and terminal policy rates sit are still open for debate," said Naomi Fink, chief global strategist at Amova Asset Management.

Hawkish signals from other central banks have added to doubts about the yen's yield advantage, though the possibility of intervention from Tokyo has limited bearish bets. Last week, ECB President Christine Lagarde pushed back against investor expectations for aggressive rate increases, saying a measured approach would be enough to contain inflation.

"European Central Bank officials have so far maintained a notably hawkish tone, keeping an October hike firmly on the table," ING FX strategist Francesco Pesole wrote. "Even so, investors appear increasingly willing to embrace the opposite narrative, pointing to further near-term downside pressure on the euro/dollar."

Markets are pricing about a 30% chance that the BOJ raises its benchmark short-term rate to 1.5% in October, and roughly a 50% chance that the Federal Reserve lifts its funds rate window by 25 basis points to 4% to 4.25%.