Oil prices collapsed by 16%, and the U.S. dollar was unable to hold on, giving up all of its gains during the year.

The U.S. Dollar Index posted its largest single-day decline of the year on Wednesday, at one point erasing all of its year-to-date gains. The euro, British pound and Japanese yen each rose more than 1% during the session. Market participants noted that the volatility was mainly driven by rapid long-position liquidation. As oil prices retreated, expectations of Federal Reserve rate cuts reignited. However, doubts over the stability of the cease-fire agreement led the dollar to rebound 0.6% from its session low. The market remains headline-driven, and conditions could reverse at any time.

The U.S.-Iran cease-fire weighed on oil prices, sharply reducing safe-haven demand for the U.S. dollar.

On Wednesday, following news of a two-week truce between the U.S. and Iran, Brent crude futures plummeted 16%, marking the steepest one-day drop in nearly six years, before paring some losses.

Ebbing safe-haven sentiment also pressured the dollar. The ICE U.S. Dollar Index tumbled as much as 1.2%, wiping out its year-to-date advance, while the Bloomberg Dollar Spot Index fell 0.8%, notching its worst single-day performance since January this year.

The U.S. dollar declined against all 16 major currencies, with the euro, pound and yen each gaining more than 1% at their intraday peaks.

However, according to CCTV News, the Strait of Hormuz was closed again on local time April 8. Earlier reports said Iran had halted oil tanker traffic through the strait after Israel’s attacks on Lebanon. Gains in risk assets faded somewhat, and the U.S. dollar rebounded 0.6% from its daily low.

Cease-fire triggers rapid dollar long liquidation

News of the two-week U.S.-Iran truce quickly prompted a market repricing of easing Middle East tensions.

The dollar’s prior strength stemmed partly from its relative safe-haven status and the view that the U.S. economy was more resilient to global energy shocks.

Leah Traub, portfolio manager at Lord Abbett & Co., stated:

“This is a pure relief rally, especially after the escalation early last week. It makes perfect sense for non-U.S. markets to outperform, given the disproportionate negative impact of the war and energy price shocks outside the U.S.”

Market observers noted that Wednesday’s sharp currency moves partly reflected traders closing out long dollar positions, with no fundamental shift in investors’ underlying views.

Citi’s foreign exchange strategy team wrote in a Wednesday note:

“With the two-week cease-fire as an anchor, leveraged investors are more inclined to redeploy capital back into the market. This dynamic makes us reluctant to buy the dollar on dips for now.”

Rate-cut expectations reignite, but uncertainty lingers

Another driver of dollar weakness is the recalibration of Federal Reserve policy expectations.

During the Middle East conflict, surging energy prices reignited inflation fears, sharply paring market bets on Fed rate cuts.

As oil prices retreated, expectations for rate hikes from the European Central Bank and the Bank of England this year fell significantly. Bets on Fed rate cuts in 2026 rebounded, with markets now pricing in roughly a 33% chance of one cut this year.

Analysts said that if oil prices extend their decline, rate-cut expectations could strengthen further.

Shifts in sentiment in the foreign exchange options market confirm this pivot.

An index measuring expected one-month volatility of a basket of currencies against the dollar fell to its lowest level since the conflict began. Options data also showed a sharp contraction in bullish sentiment toward the U.S. dollar over the same period.

According to options trading data compiled by Bloomberg from the Depository Trust & Clearing Corporation, options volume on Wednesday was about 11% above recent averages, with particularly active trading in the euro and pound.

Sustained access to the Strait of Hormuz is the key variable

Central to the cease-fire agreement is guaranteed passage through the Strait of Hormuz.

Andrew Hazlett, foreign exchange trader at Monex Inc., commented:

“The cease-fire news and reduced fears of an energy crisis have put significant pressure on the dollar. The key question in the coming days will be: how fully does shipping resume through the Strait of Hormuz, and will this lead to a sustained de-escalation?”

Skylar Montgomery Koning, macro strategist at Bloomberg, also noted that Brent crude has only given up roughly half of its recent gains, while the dollar’s decline appears to have slightly overshot what commodity signals would imply.

She added that longer-term currency trends will depend on how much lasting damage the earlier shock has inflicted on the economy.

Although market sentiment has improved markedly, the stability of the cease-fire remains in doubt.

On Wednesday, data from maritime traffic tracking systems showed the oil tanker *AUROURA*, which had been heading toward the Strait of Hormuz, suddenly changed course near Oman’s Musandam Peninsula, turned 180 degrees, and sailed back deep into the Persian Gulf.

Fighting has not fully ceased in the Middle East, and the Strait of Hormuz remains blocked, underscoring the fragility of the agreement. This also means the dollar’s losses could reverse quickly if tensions escalate again. Kathleen Brooks, research director at XTB, stated:

“While caution is warranted, the scale of market moves has been remarkable. This remains a headline-driven market, and any signs that the cease-fire is under threat could trigger renewed volatility.”

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