By Ankur Banerjee and Jiaxing Li HONG KONG, March 17 (Reuters) - The U.S. dollar drifted on Tuesday as traders weighed developments in the Iran war, while the Australian dollar eased slightly ahead of
Dollar moves lower for second straight day ahead of major central bank decisions
By Chibuike Oguh
Market Reactions and Central Bank Policy Expectations
NEW YORK, March 17 (Reuters) - The U.S. dollar was lower against peer currencies for the second straight session on Tuesday, reflecting market positioning ahead of major central bank interest rate decisions this week.
The dollar had reached a 10-month high as the Middle East conflict and rising oil prices prompted investors to seek safety in U.S. assets.
Upcoming Central Bank Announcements
The U.S. Federal Reserve will announce its policy decision on Wednesday, with the European Central Bank, the Bank of England and the Bank of Japan following a day later. They are all expected to keep rates unchanged although traders will be looking out for commentary about inflation and economic outlook amid the U.S.-Israeli war on Iran.
Expectations for Rate Changes
Expectations for Federal Reserve easing have also been scaled back, with markets now assigning about 25 basis points of cuts this year. Traders are pricing in almost two European Central Bank rate hikes in 2026, a sharp shift from the roughly 50% chance of a cut seen before the conflict began.
Recent Dollar Performance
The dollar was down 0.40% to 0.7846 against the Swiss franc, on track for the second straight day of declines.
The dollar index had hit 100.54 on Friday, its highest level since May 2025. It has eased from that peak in the last two sessions, and was last down 0.31% to 99.55.
Market Sentiment
"I think this is mostly market positioning but I am beginning to detect a subtle change in sentiment although we wouldn't know for sure until we get to the other side of the Federal Reserve meeting," said Marc Chandler, chief market strategist at Bannockburn Global Forex LLC. "It seems to me that since the war began, the dollar was bought on dips and now I think the dollar is being sold on rallies."
Oil Prices and Geopolitical Tensions
Brent crude futures remained above $100 a barrel on worries about supply, with the Strait of Hormuz mostly shut. They have risen more than 40% since February and settled up 3.2% to $103.42 per barrel.
Impact of Middle East Conflict
Iran renewed attacks on the United Arab Emirates on Tuesday, causing oil loading at the port of Fujairah to be at least partly halted after the third attack in four days ignited a fire at the export terminal. Fujairah is located on the Gulf of Oman, just outside the Strait of Hormuz.
Federal Reserve's Policy Outlook
Fed officials, including Chair Jerome Powell, are likely to be hawkish and will attempt to forcefully signal to financial markets to expect a prolonged pause in rate cuts given rising oil prices and the prospect of higher inflation, Macquarie Group analysts led by Thierry Wizman said in an investor note.
Potential Policy Moves
"They can do this mildly by letting the median 'dot' point to that single cut in 2026 (confirming the OIS market's dialed-back projections for rate cuts), or they can do it more aggressively, by changing the statement to reflect a 'neutral' policy bias, thus giving itself several more months to consider a rate cut (or hike) without the pressure of the claim that it is misleading markets in the event that oil prices stay high and inflation rises uncomfortably," the analysts said.
Currency Movements
Euro Performance
The euro was up 0.31% against the dollar at $1.15403 after dropping to as low as $1.1409 in the prior session, for its lowest level since August 2025.
Australian Dollar Rises After Second Rate Hike
Reserve Bank of Australia Decision
Australia's central bank raised rates for a second straight month to a 10-month high, undoing two of the three cuts it made last year and cautioning that risks to inflation have tilted further to the upside. It was the central bank's most tightly contested vote since it began disclosing tallies last year, with the board split 5-4 in favor of the hike.
The Australian dollar rose 0.46% to 0.71040 against the dollar.
Japanese Yen and Intervention Prospects
Government and Bank of Japan Statements
The yen has veered toward the 2024 forex intervention zone of 161 amid rising oil prices and the Middle East conflict.
Japanese Finance Minister Satsuki Katayama said on Monday and reiterated on Tuesday that the government was prepared to take decisive steps against volatility in foreign exchange and other financial markets.
Bank of Japan Governor Kazuo Ueda said underlying inflation was accelerating toward the bank's 2% target, stressing that price rises must be matched by solid wage gains.
The Japanese yen was last up 0.01% against the greenback to 159 per dollar.
(Reporting by Chibuike Oguh in New York; Editing by Will Dunham)
