Dollar Supported by Ongoing US-Iran War

The dollar index (DXY00) on Wednesday rose by +0.22%. The dollar recovered from early losses on Wednesday and moved higher after Iran said it rejected the latest US peace proposal. Also, Wednesday’s US economic news, showing the Feb import price index ex-petroleum posting its biggest increase in 4 years, is hawkish for Fed policy and supportive of the dollar.
The dollar initially moved lower on Wednesday as stocks rallied after the Trump administration stepped up efforts to end the war with Iran and sent Iran a 15-point peace proposal to end the hostilities. Also, Wednesday’s 2% fall in crude oil prices may curb price pressures and allow the Fed to keep cutting interest rates, a bearish factor for the dollar.
US MBA mortgage applications fell -10.5% in the week ended March 20, with the mortgage purchase sub-index down -5.4% and the refinancing mortgage sub-index down -14.6%. The average 30-year fixed rate mortgage rose +13 bp to 6.43% from 6.30% the prior week.
The US Feb import price index ex-petroleum rose +1.2% m/m, stronger than expectations of +0.4% m/m and the biggest increase in 4 years.
Swaps markets are discounting the odds at 4% for a +25 bp rate hike at the April 28-29 FOMC meeting.
The dollar continues to be undercut by a poor outlook for interest rate differentials, with the FOMC expected to cut interest rates by at least -25 bp in 2026, while the BOJ and ECB are expected to raise rates by at least +25 bp in 2026.
EUR/USD (^EURUSD) on Wednesday fell by -0.38%. The euro was under pressure on Wednesday as business confidence sank in Germany after the German Mar IFO business climate fell to a 13-month low. Also, dovish comments from ECB President Lagarde undercut the euro when she said the ECB could look through a limited short-lived energy shock from the Iran war.
The German Mar IFO business climate fell -2.0 to a 13-month low of 86.4.
ECB President Lagarde said it is too early to determine the response to the war and