Lead

The US dollar index slipped to just below 99.15 as market participants weighed the continued risk of a closed Strait of Hormuz. The decline came amid statements from the Bank of England’s Megan Greene warning that the second‑round effects of the energy price shock would not materialise until next year, and a report that Iranian and Omani technical teams were negotiating a safe‑transit mechanism.

Background

The Strait of Hormuz, through which about 20% of global oil passes, has been functionally closed since tensions between the United States and Iran escalated in early 2026. The shutdown has tightened global oil supplies and pushed WTI crude to $101.50 before easing slightly in the early European session. Central banks, particularly the Bank of England, have highlighted the difficulty of managing monetary policy when supply shocks disrupt the economy.

What Happened

During the European trading session on Monday, the US dollar index fell to a low of 99.15, reversing earlier gains. The decline followed a report that Iranian and Omani technical teams met in Oman to negotiate a safe‑transit mechanism for the Strait of Hormuz. Iran’s foreign ministry spokesperson confirmed that the process of talks through Pakistani mediation is ongoing, with both Iran and the United States having sent comments on the proposal. Meanwhile, the Bank of England’s Megan Greene stated that the second‑round effects of the energy price shock would not appear until next year, signalling that the immediate inflationary impact may be muted.

Currency markets reflected the uncertainty. The USD/CHF pair lost its five‑day winning streak, trading around 0.7860, while the USD/JPY approached 158.84, with analysts noting a potential push above 159.00. The Australian dollar held gains against the US dollar, and the euro ticked up from six‑week lows to 1.1635. The Indian rupee, meanwhile, slid to a record low above 96 per US dollar, losing about 5.5% since the Iran conflict began.

Market & Industry Implications

Oil markets have tightened as the Strait of Hormuz remains closed, with global crude and refined product stocks drawing down. The Rabobank Global Daily report highlighted the functional closure and its impact on supply. The Bank of England’s caution suggests that central banks may need to remain vigilant for delayed inflationary pressures. The European Central Bank’s survey indicates that a Middle East‑driven oil shock would hit inflation more than activity, potentially affecting 2027 growth projections.

Currency volatility has increased risk aversion, as seen in the Swiss franc’s advance and the US dollar’s loss of gains. The Japanese government, through Chief Cabinet Secretary Seiji Kihara, has stated it is watching market moves with high urgency but has declined to comment on potential intervention. The Australian dollar’s modest gains suggest that commodity‑linked currencies may remain resilient despite the oil supply concerns.

What to Watch

  • Next week’s technical meetings between Iran and Oman to finalize the safe‑transit mechanism.
  • Bank of England’s Monetary Policy Committee decisions, particularly any reference to the delayed impact of the energy shock.
  • European Central Bank’s policy outlook for 2027, especially regarding inflation expectations.
  • US Treasury and Treasury Department statements on sanctions relief for Iran in exchange for safe‑transit guarantees.