The dollar shed some of its recent safe-haven demand on Tuesday as traders took a step back following U.S. remarks that hinted the conflict in the Middle East could be shorter than feared. In early Asia trade the greenback was still firm at 157.73 yen and $1.1632 per euro, but it retreated from the day-earlier highs after comments from U.S. President Donald Trump.
Speaking to CBS News, he described the war against Iran as "very complete" and said Washington was "very far ahead" of his initial four- to five-week time estimate. Iran’s Revolutionary Guards quickly dismissed those remarks as "nonsense," but the U.S. comments appeared to temper immediate fears of a prolonged disruption to oil supplies and encouraged a wait-and-see stance among market participants.
Brent crude futures were trading at $92.46 a barrel in the Asia morning, down from intraday peaks near $120 on Monday. The retreat in oil prices coincided with a modest rally in sentiment across risk-sensitive assets.
The Australian dollar, which had lingered around 70 cents since the outbreak of the conflict, steadied at about $0.7068. "The market is just taking a breather," said Rodrigo Catril, senior currency strategist at National Australia Bank in Sydney. "We’re cautious in the sense that it may not be as simple as just declaring the end of the war ... our sense is that we haven’t seen the end of the volatility."
The greenback had been a favoured refuge after U.S. and Israeli strikes on Iran all but halted oil and gas exports through the Strait of Hormuz, pushing energy prices sharply higher. That surge in energy costs had raised investor concern that a sustained spike would act as a tax on business activity and consumer spending, curbing global growth and reducing central banks' room to ease interest rates.
Other major currencies showed signs of stabilization. Sterling recovered from a Monday dip to trade around $1.3412, while the New Zealand dollar steadied at $0.5932. The broader move away from extreme risk aversion reflected the market's response to competing signals about the likely duration and severity of the conflict.
A Deutsche Bank analysis published on Monday argued that for investors to make large-scale shifts out of risky assets, several conditions would likely need to be met: oil prices remaining high, a policy pivot by central banks, and clear evidence of a wider economic slowdown. "How close are we to meeting those thresholds? Much closer than a week ago," said strategist Henry Allen. "But on several metrics we aren’t quite there yet, which explains why equities aren’t yet seeing bear-market declines, like we saw in 2022," he added, referencing the market reaction to the energy shock after Russia’s invasion of Ukraine.
For now, markets appear to be balancing between relief driven by the prospect of a limited conflict and caution about the potential for renewed volatility if the situation changes. Traders and investors remain alert to further developments that could quickly shift oil prices and risk sentiment again.