The dollar index (DXY00) on Tuesday spent most of the day on the downside, then recovered a bit in the afternoon, ending little changed. The dollar came under downward pressure from Tuesday’s nearly -12% plunge in oil prices, which was dovish for Fed policy. However, the dollar had underlying support from the +5.6 bp rise in the 10-year T-note yield.
Tuesday’s existing home sales report was supportive of the dollar. US Feb existing home sales rose by +1.7% m/m to 4.09 million, stronger than expectations for a decline to 3.88 million.
An Iranian drone attack on Tuesday caused the biggest refinery in the UAE at the Ruwais Industrial Complex to halt operations due to a fire in the complex. Also, Iran’s semi-official Mehr news agency reported an explosion involving a tanker near Abu Dhabi, but no further details were available.
Despite those disruptions, April WTI crude oil futures prices on Tuesday plunged by nearly -12%, erasing part of the sharp rally seen in the past 1-1/2 weeks. Oil prices on Monday spiked to a high of $119 per barrel after Israel over the weekend bombed 30 Iranian fuel depots. However, WTI oil prices have since fallen to the $83-per-barrel area after President Trump said on Monday that the war with Iran is “pretty much” over, and after G-7 finance ministers said on Monday that the G-7 nations stand ready to release oil stockpiles if needed. At a press conference Monday evening, President Trump was asked when the war would end, and he answered, “I think soon, very soon.”
Iran has shown no signs of backing down, despite the withering air campaign launched by Israel and the US. Iran’s Assembly of Experts over the weekend appointed hardliner Mojtaba Khamenei as Iran’s new supreme leader, the son of Ayatollah Ali Khamenei. Iran’s new leader has close ties to Iran’s powerful and entrenched Islamic Revolutionary Guard Corps (IRGC).
Swaps markets are discounting the odds at 0% for a -25 bp rate cut at the next FOMC policy meeting on March 17-18.
The dollar continues to be undercut by a poor 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.
