Dollar slips in Asia as Iran diplomacy doubts trim Fed hike bets

Thursday 26 March 2026 - 11:17

By: Dakir Madiha

Dollar slips in Asia as Iran diplomacy doubts trim Fed hike bets

The US dollar eased slightly in Asian trading Thursday. Investors parsed prospects for diplomatic efforts to de-escalate the US-Israel-Iran conflict. Expectations for Federal Reserve rate hikes by year-end fell.

The US dollar index, tracking the currency against six major peers, dropped 0.1 percent. It hovered near 99.5 after its biggest one-day gain in a week. The level sits below 10-month peaks hit early March when conflict first spiked energy prices.

Markets grapple with mixed signals from the near month-old war. It began February 28 with joint US-Israeli airstrikes on Iran. Iran's Foreign Minister Abbas Araghchi said Wednesday Tehran reviews a US proposal to end fighting but rules out direct talks. State TV quoted him calling mediator message exchanges "not negotiations with the United States."

President Donald Trump hailed progress. He claimed Iran offered a "very significant reward" tied to oil, gas, and the Strait of Hormuz. His administration reportedly tabled a 15-point peace plan via Pakistani intermediaries, publicly rejected by Iran. Mediators floated possible in-person Iranian-US talks Friday in Pakistan, per Associated Press-cited Egyptian and Pakistani officials.

"Markets react mainly to headlines, intensely focused on whether recent developments signal true de-escalation or prelude new tension," Westpac analysts noted.

The Fed held its key rate at 3.5-3.75 percent on March 18. Policymakers called Middle East fallout for the US economy "uncertain." Strait of Hormuz closure drove global oil prices sharply higher, complicating the Fed's inflation fight.

FedWatch futures now show 70.6 percent odds of steady rates through December, up from 60.2 percent yesterday. Chicago Fed President Austan Goolsbee told Bloomberg he could see rate hikes if inflation runs hot, but cuts remain possible if it eases.

The dollar gained about 2 percent over the past month. Conflict fueled safe-haven demand while energy cost surges revived inflation fears. Gains stalled as traders weighed conflicting diplomacy cues. The euro steadied at $1.1570 after two loss days. The yen held near 2024 lows at 159.39 per dollar.

State Street Global Advisors recently noted the dollar "should trend higher during this high geopolitical risk period." Longer-term outlooks carry "negative bias" from eventual Fed easing bets, soft retail sales, and investor shifts away from US assets.