The U.S. dollar approached six-week lows on Wednesday, having given up nearly all the gains achieved since the onset of the Iran war, as indications of renewed discussions between Washington and Tehran bolstered risk appetite. Tehran has effectively closed the Strait of Hormuz, a vital passage for a fifth of global oil and gas shipments, since the onset of the U.S.-Israel conflict with Iran on February 28. This development has led to a surge in oil prices and raised concerns regarding the impact on global growth and inflation. Following the breakdown of negotiations over the weekend, Washington has enacted a blockade on Iranian ports. However, U.S. President Donald Trump indicated on Tuesday that discussions aimed at resolving the conflict may take place in Pakistan in the near future. This bolstered investor confidence sufficiently to reduce the demand for dollars as a safe haven.

The euro, having regained its losses from the war, was down 0.1% at $1.177, close to its peak since March 2. Sterling experienced a slight decline, trading at $1.355. The dollar index, which assesses the U.S. currency relative to six others, has returned to its levels from the end of February, having experienced an increase of up to 3% at one point in early March. Despite the lack of progress in discussions in Islamabad last weekend, which has cast uncertainty on the sustainability of the two-week ceasefire that still has a week remaining, investors remain optimistic that diplomatic efforts may still yield a resolution. The dollar has positioned itself as the primary recipient of safe-haven flows in March; however, growing optimism regarding a ceasefire and potential resolution has led to a decline of nearly 2% this month against other major currencies.

In light of the significant uncertainty surrounding the situation, MUFG currency strategist Lee Hardman indicated that it might be premature to conclude that the dollar’s status as a safe haven has diminished. In the immediate future, we exercise some caution regarding further declines in the dollar, as the market seems somewhat optimistic that the worst is behind us and a return to normalcy may occur sooner than realistically expected,” Hardman stated. “I still think there’s a risk that the market’s underestimating the energy price shock, that it’s likely to hit the global economy,” he said.

Investor attention is firmly directed towards assessing the impact of the energy shock on the global economy, particularly given that physical crude prices have surpassed $140 a barrel, while futures have dipped below $100 once more. The International Monetary Fund has revised its growth outlook downward in response to the surge in energy prices, indicating that the global economy is already veering toward a more unfavorable scenario characterized by significantly weaker growth. According to the IMF’s most pessimistic scenario, the global economy is on the edge of recession, with oil prices projected to average $110 a barrel in 2026 and $125 in 2027.