Dollar Posts Largest Weekly Drop Since January as Oil Shock Pushes Global Central Banks Toward Rate Hikes

The US dollar closed out last week on the back foot, posting its steepest weekly decline since late January as central banks across the developed world signaled they were prepared to raise interest rates in response to the energy price shock triggered by the war in Iran.

While the greenback managed a modest intraday gain on Friday, the dollar index still finished the week down roughly 0.94 percent at 99.59, reflecting a dramatic repricing of global monetary policy expectations Dollar toppled as oil shock turns central banks hawkishchannelnewsasia.com·SecondaryFILE PHOTO: U.S. dollar banknotes are seen in this illustration taken May 4, 2025. REUTERS/Dado Ruvic/Illustration/File Photo NEW YORK/LONDON, March 20 : The dollar gained on Friday but was still headed for a weekly fall against major currencies as investors pared back bets on interest rate cuts from the U.S. Federal Reserve given the likelihood of higher inflation from rising energy prices. Before the U.S.. Before the US-Israeli military campaign against Iran began in late February, currency markets had priced in two Federal Reserve rate cuts for 2026. By Friday, even one cut appeared to be a distant prospect Dollar toppled as oil shock turns central banks hawkishchannelnewsasia.com·SecondaryFILE PHOTO: U.S. dollar banknotes are seen in this illustration taken May 4, 2025. REUTERS/Dado Ruvic/Illustration/File Photo NEW YORK/LONDON, March 20 : The dollar gained on Friday but was still headed for a weekly fall against major currencies as investors pared back bets on interest rate cuts from the U.S. Federal Reserve given the likelihood of higher inflation from rising energy prices. Before the U.S..

The shift was not confined to the United States. The euro, the Japanese yen, the British pound and the Swiss franc all posted weekly gains against the dollar as policymakers in Frankfurt, London, Tokyo and Canberra laid the groundwork for tighter monetary policy Dollar toppled as oil shock turns central banks hawkishchannelnewsasia.com·SecondaryFILE PHOTO: U.S. dollar banknotes are seen in this illustration taken May 4, 2025. REUTERS/Dado Ruvic/Illustration/File Photo NEW YORK/LONDON, March 20 : The dollar gained on Friday but was still headed for a weekly fall against major currencies as investors pared back bets on interest rate cuts from the U.S. Federal Reserve given the likelihood of higher inflation from rising energy prices. Before the U.S.. The common thread: soaring energy costs that have choked oil and gas supplies flowing through the Strait of Hormuz, one of the world's most critical energy chokepoints.

Brent Crude Reaches Levels Not Seen Since 2022

Benchmark Brent crude futures have surged roughly 50 percent since the US and Israel launched strikes against Iran, which has effectively closed the Strait of Hormuz and disrupted Middle East energy exports Dollar toppled as oil shock turns central banks hawkishchannelnewsasia.com·SecondaryFILE PHOTO: U.S. dollar banknotes are seen in this illustration taken May 4, 2025. REUTERS/Dado Ruvic/Illustration/File Photo NEW YORK/LONDON, March 20 : The dollar gained on Friday but was still headed for a weekly fall against major currencies as investors pared back bets on interest rate cuts from the U.S. Federal Reserve given the likelihood of higher inflation from rising energy prices. Before the U.S.. On Friday, Brent futures for May delivery settled up 3.26 percent at $112.19 a barrel, the highest closing price since July 2022 Dollar toppled as oil shock turns central banks hawkishchannelnewsasia.com·SecondaryFILE PHOTO: U.S. dollar banknotes are seen in this illustration taken May 4, 2025. REUTERS/Dado Ruvic/Illustration/File Photo NEW YORK/LONDON, March 20 : The dollar gained on Friday but was still headed for a weekly fall against major currencies as investors pared back bets on interest rate cuts from the U.S. Federal Reserve given the likelihood of higher inflation from rising energy prices. Before the U.S..

The scale of the disruption is difficult to overstate. Approximately one-fifth of the world's oil supply transits the strait under normal conditions, and with that artery all but shut, markets are contending with a supply deficit that has no clear resolution timeline. Insurance costs for vessels attempting passage have spiked, and several major tanker operators have suspended transits entirely.

The price shock has rippled through the global economy in ways that extend well beyond the fuel pump. Higher energy costs raise transport and manufacturing expenses, squeeze household budgets and erode purchasing power — a chain reaction that central bankers are now being forced to confront.

A Week of Hawkish Signals

Last week marked a turning point for global monetary policy. In the space of a few days, four of the world's most influential central banks either held rates steady with a conspicuously hawkish tone or moved to tighten outright.

The European Central Bank kept its benchmark rate unchanged on Thursday but issued an explicit warning about energy-driven inflation. The ECB revised its medium-term inflation expectations upward, and money markets have begun pricing in the possibility of rate hikes as early as next month — a stark reversal from the easing trajectory the bank had been expected to follow.

The Bank of England likewise held rates steady but triggered a sharp selloff in short-dated gilts by signaling it was prepared to act if inflationary pressures from energy prices continued to build Dollar toppled as oil shock turns central banks hawkishchannelnewsasia.com·SecondaryFILE PHOTO: U.S. dollar banknotes are seen in this illustration taken May 4, 2025. REUTERS/Dado Ruvic/Illustration/File Photo NEW YORK/LONDON, March 20 : The dollar gained on Friday but was still headed for a weekly fall against major currencies as investors pared back bets on interest rate cuts from the U.S. Federal Reserve given the likelihood of higher inflation from rising energy prices. Before the U.S.. The language was notably more forceful than markets had anticipated, suggesting that rate hikes are now firmly on the table in London.

The Bank of Japan surprised markets by leaving the door open to a rate increase as soon as April, wrong-footing investors who had positioned for a continued slide in the yen Dollar toppled as oil shock turns central banks hawkishchannelnewsasia.com·SecondaryFILE PHOTO: U.S. dollar banknotes are seen in this illustration taken May 4, 2025. REUTERS/Dado Ruvic/Illustration/File Photo NEW YORK/LONDON, March 20 : The dollar gained on Friday but was still headed for a weekly fall against major currencies as investors pared back bets on interest rate cuts from the U.S. Federal Reserve given the likelihood of higher inflation from rising energy prices. Before the U.S.. The yen was down roughly 1 percent against the greenback on Friday at 159.30 per dollar, but was still on track for a 0.24 percent weekly gain Dollar toppled as oil shock turns central banks hawkishchannelnewsasia.com·SecondaryFILE PHOTO: U.S. dollar banknotes are seen in this illustration taken May 4, 2025. REUTERS/Dado Ruvic/Illustration/File Photo NEW YORK/LONDON, March 20 : The dollar gained on Friday but was still headed for a weekly fall against major currencies as investors pared back bets on interest rate cuts from the U.S. Federal Reserve given the likelihood of higher inflation from rising energy prices. Before the U.S..

Most strikingly, the Reserve Bank of Australia hiked interest rates for the second consecutive month on Tuesday, and investors are now pricing in additional increases Dollar toppled as oil shock turns central banks hawkishchannelnewsasia.com·SecondaryFILE PHOTO: U.S. dollar banknotes are seen in this illustration taken May 4, 2025. REUTERS/Dado Ruvic/Illustration/File Photo NEW YORK/LONDON, March 20 : The dollar gained on Friday but was still headed for a weekly fall against major currencies as investors pared back bets on interest rate cuts from the U.S. Federal Reserve given the likelihood of higher inflation from rising energy prices. Before the U.S.. The Australian dollar weakened 0.99 percent against the greenback to $0.702 on Friday but posted a weekly gain of 0.53 percent Dollar toppled as oil shock turns central banks hawkishchannelnewsasia.com·SecondaryFILE PHOTO: U.S. dollar banknotes are seen in this illustration taken May 4, 2025. REUTERS/Dado Ruvic/Illustration/File Photo NEW YORK/LONDON, March 20 : The dollar gained on Friday but was still headed for a weekly fall against major currencies as investors pared back bets on interest rate cuts from the U.S. Federal Reserve given the likelihood of higher inflation from rising energy prices. Before the U.S..

Juan Perez, director of trading at Monex USA, observed that central banks sounded more confident about the inflation threat than markets had expected, particularly the Bank of England and the Bank of Japan Dollar toppled as oil shock turns central banks hawkishchannelnewsasia.com·SecondaryFILE PHOTO: U.S. dollar banknotes are seen in this illustration taken May 4, 2025. REUTERS/Dado Ruvic/Illustration/File Photo NEW YORK/LONDON, March 20 : The dollar gained on Friday but was still headed for a weekly fall against major currencies as investors pared back bets on interest rate cuts from the U.S. Federal Reserve given the likelihood of higher inflation from rising energy prices. Before the U.S.. He noted that this followed the Federal Reserve's own message earlier in the week, which reinforced the expectation that rate cuts were off the table for the foreseeable future Dollar toppled as oil shock turns central banks hawkishchannelnewsasia.com·SecondaryFILE PHOTO: U.S. dollar banknotes are seen in this illustration taken May 4, 2025. REUTERS/Dado Ruvic/Illustration/File Photo NEW YORK/LONDON, March 20 : The dollar gained on Friday but was still headed for a weekly fall against major currencies as investors pared back bets on interest rate cuts from the U.S. Federal Reserve given the likelihood of higher inflation from rising energy prices. Before the U.S..

The Fed Stands Alone — But Not by Choice

The Federal Reserve left its benchmark interest rate unchanged at its meeting last Wednesday, as widely expected. But Chair Jerome Powell's remarks afterward underscored the unusual uncertainty the war has introduced into the economic outlook. Powell acknowledged that it was too early to determine the full scope and duration of the conflict's economic impact Dollar toppled as oil shock turns central banks hawkishchannelnewsasia.com·SecondaryFILE PHOTO: U.S. dollar banknotes are seen in this illustration taken May 4, 2025. REUTERS/Dado Ruvic/Illustration/File Photo NEW YORK/LONDON, March 20 : The dollar gained on Friday but was still headed for a weekly fall against major currencies as investors pared back bets on interest rate cuts from the U.S. Federal Reserve given the likelihood of higher inflation from rising energy prices. Before the U.S..

The Fed's position is increasingly isolated. While other G10 central banks are now being priced for rate hikes, the Fed is priced for fewer cuts — a policy divergence that has contributed directly to the dollar's weakness. Bank of America Global Research analysts led by Adarsh Sinha noted that markets had preempted official communication with a dramatic shift in policy pricing, describing the repricing as having mitigated some of the dollar's initial oil-induced rally Dollar dips as oil shock turns central banks hawkishi-invdn-com.investing.com·Secondary.

This divergence places the Fed in a difficult spot. If energy prices continue to rise, the inflationary impulse will make it even harder to justify rate cuts, potentially forcing the central bank to maintain its current restrictive stance for longer than the economy can comfortably absorb. The specter of stagflation — the toxic combination of rising prices and slowing growth — is now a live concern on Wall Street.

Currency Markets Reflect the New Reality

The week's currency moves told a clear story. The euro dipped 0.25 percent to $1.156 on Friday but was on track for a 1.3 percent weekly gain . Sterling weakened 0.72 percent to $1.333 on the day but was set for a nearly 0.84 percent weekly advance against the dollar Dollar toppled as oil shock turns central banks hawkishchannelnewsasia.com·SecondaryFILE PHOTO: U.S. dollar banknotes are seen in this illustration taken May 4, 2025. REUTERS/Dado Ruvic/Illustration/File Photo NEW YORK/LONDON, March 20 : The dollar gained on Friday but was still headed for a weekly fall against major currencies as investors pared back bets on interest rate cuts from the U.S. Federal Reserve given the likelihood of higher inflation from rising energy prices. Before the U.S.. The Swiss franc traded flat at 0.788 per dollar but was heading for a 0.43 percent weekly gain Dollar toppled as oil shock turns central banks hawkishchannelnewsasia.com·SecondaryFILE PHOTO: U.S. dollar banknotes are seen in this illustration taken May 4, 2025. REUTERS/Dado Ruvic/Illustration/File Photo NEW YORK/LONDON, March 20 : The dollar gained on Friday but was still headed for a weekly fall against major currencies as investors pared back bets on interest rate cuts from the U.S. Federal Reserve given the likelihood of higher inflation from rising energy prices. Before the U.S..

Still, many analysts caution against assuming the dollar's decline will persist indefinitely. The greenback retains structural advantages as the world's reserve currency, and a prolonged risk-off environment could still trigger safe-haven flows back into dollar-denominated assets. The question is whether the hawkish pivot by other central banks will prove durable enough to sustain the current trend.

What Comes Next

The immediate outlook hinges on two variables: the trajectory of energy prices and the willingness of central banks to follow through on their hawkish rhetoric.

If the Strait of Hormuz remains effectively closed and Brent crude continues to climb, the inflationary pressure on developed economies will intensify, leaving policymakers with little choice but to tighten. That would represent a fundamental reversal of the global easing cycle that was widely anticipated entering 2026.

Conversely, any diplomatic breakthrough that restores even partial oil flows through the strait could rapidly deflate the energy premium in markets, easing inflation fears and potentially returning central banks to a more neutral posture.

For now, currency traders are betting that the hawkish shift is real and durable. The dollar's weekly decline — its largest since late January — suggests that markets believe the global interest rate landscape has changed in a way that will persist beyond the current news cycle Dollar toppled as oil shock turns central banks hawkishchannelnewsasia.com·SecondaryFILE PHOTO: U.S. dollar banknotes are seen in this illustration taken May 4, 2025. REUTERS/Dado Ruvic/Illustration/File Photo NEW YORK/LONDON, March 20 : The dollar gained on Friday but was still headed for a weekly fall against major currencies as investors pared back bets on interest rate cuts from the U.S. Federal Reserve given the likelihood of higher inflation from rising energy prices. Before the U.S..

The war in Iran has produced consequences that extend far beyond the Middle East. By reshaping the calculus of central bankers from Sydney to Frankfurt, the conflict has introduced a new source of volatility into global financial markets — one that is likely to define the economic trajectory of 2026.