The dollar is pulling back.

• Easing tensions in the Middle East have weakened the dollar.
• Meanwhile, the Bank of England is guiding rate expectations, keeping the prospect of two hikes intact.

Over the past two weeks, the US dollar has slid to its weakest level since early March, erasing nearly all the gains recorded at the onset of the Middle East conflict. With talks involving Iran expected to resume soon, and Donald Trump maintaining that the war will end shortly without the need for a ceasefire extension, geopolitical support for the greenback has faded. Alongside record highs in US equity indices, this shift has helped sustain the EUR/USD rally, as macroeconomic factors regain prominence.

At the same time, investor focus has turned toward corporate earnings and Congressional discussions over Kevin Warsh’s potential appointment as Fed Chair. Despite Trump’s assurances, a leadership change at the Fed could coincide with rising inflation driven by higher oil prices, potentially necessitating tighter monetary policy. The key question remains whether Warsh would align with the president’s stance or uphold the Fed’s independence.

Some investors are drawing comparisons to the 1970s, when an oil-driven inflation shock prompted a Fed Chair aligned with the White House to loosen policy. That decision fueled even higher inflation and entrenched expectations, leading to a sharp decline in the US dollar. Only after a change in leadership and aggressive rate hikes—despite a recession—did the dollar begin a sustained recovery from mid-1980 onward.

Potential currency interventions may also weigh on the dollar. Japan’s Finance Minister, Satsuko Katayama, has long advocated selling USD/JPY, and her rhetoric has intensified following talks with Scott Bessent. This hints that the US may be open to coordinated action in the FX market, reminiscent of the 1985 interventions that triggered a prolonged decline in the dollar.

Meanwhile, other European currencies are advancing alongside the euro. The British pound has climbed back to pre-war levels, supported in part by the Bank of England’s hawkish tone. Megan Green has backed market expectations of two rate hikes in 2026, while Andrew Bailey suggested earlier projections of four hikes were excessive.