FOREX-Dollar falters after Iran's offer to reopen Hormuz sends oil lower

The dollar whipsawed on Tuesday, weakening after hitting a near-two-month high after oil prices fell following Iran's proposal to reopen the Strait of Hormuz within seven days if the US eases military pressure. The US currency ‌fell 0.12% versus the yen to 157.15 , while the euro was largely unchanged at $1.146. Sterling dipped 0.09% to $1.3356.

The volatility highlights the web of forces roiling forex markets at a time when the global interest rate outlook has been complicated by the prolonged conflict in the Middle East. The disruption in the Strait of Hormuz ‌has strained global oil supplies and added to inflationary pressures, prompting investors to swiftly reprice assets at the slightest hint of a shift in outlook.

Iran can ‌reopen the Strait within 7 days if the US eases military pressure and lifts its blockade on Iranian ports, a senior Iranian official told Reuters, following an earlier report from Kyodo News. Brent crude futures dropped below $99. A sustained decline in oil prices could ease inflationary pressures, reducing the need for higher US interest rates, which could erode the dollar's yield advantage over other currencies.

The dollar index, ⁠which tracks ​the US currency against six major peers, ⁠was 0.02% lower at 100.4 after touching its highest since late July earlier in the session. MULTIPLE FACTORS WEIGH ON YEN

Traders were also weighing whether the Bank of Japan would raise rates quickly ⁠enough to close the gap with global peers. Despite the BOJ's rate hike last week, the Japanese currency has been under pressure. Investors view the dissent from two policymakers, who ​pushed for a more cautious pace, as a warning that additional hikes may be harder to implement.

"Whether the central bank quickens its pace ⁠remains contingent on how events unfold. Questions of where neutral and terminal policy rates sit are still open for debate," said Naomi Fink, chief global strategist at Amova Asset Management. Hawkish commentary from other global ⁠central ​banks has also left traders questioning the yen's yield advantage, although the prospect of intervention from Tokyo has kept bearish sentiment in check.

Last week, ECB President Christine Lagarde reacted against investor bets for aggressive rate increases, saying a measured response from the central bank would be enough to contain inflation. "European Central Bank officials have ⁠so far maintained a notably hawkish tone, keeping an October hike firmly on the table," ING's FX strategist Francesco Pesole wrote.

"Even so, investors appear increasingly willing ⁠to embrace the opposite narrative, pointing to ⁠further near-term downside pressure on the euro/dollar." Markets price about a 30% chance that the BOJ hikes its benchmark short-term rate to 1.5% in October and a roughly 50% chance that the Fed will lift its funds rate window by ‌25 basis points to 4% ‌to 4.25%.