War talk from Washington makes currency market dance

As long as the Strait of Hormuz remains closed, the White House, not the Federal Reserve, will be in charge of the currency market. This could change in the run-up to the Fed meeting.

The currency market—like the rest of the financial markets—is bouncing off US President Donald Trump's statements about the war in Iran. On Friday, White House spokeswoman Karoline Leavitt noted that it would take four to six weeks to achieve all the goals. The prospect of a long struggle pushed the dollar higher against the euro. This rally is primarily due to oil prices rising from less than $70 a barrel to over $100 a barrel since late February. According to figures from IMF Portwatch, only three or four ships a day passed through the Strait of Hormuz in March. The usual 60 to 80.

When will Trump declare victory?
There will be serious consequences if this vital oil route remains closed for much longer. The Gulf region's oil reserves are so full that Kuwait and Iraq, among others, are already having to shut down oil wells. Restarting them is an expensive and time-consuming task. However, on Monday, Trump announced that Operation Epic Fury is far ahead of schedule and that the fighting will end soon. Following that remark, the oil price immediately fell again, while the dollar also took a step back. The most likely scenario is that Trump will declare victory soon, but until then, the currency will sway on his remarks about the fighting. Even next week's Federal Reserve meeting won't change that.

Chances of a quick rate cut evaporate
It's already a given that the US central bank will leave the policy rate unchanged. While higher energy prices are slowing economic growth, they are also driving up inflation. Since September, inflation has fallen from 3,0% to 2,4%, which seemed to create increasing room for an interest rate cut. However, due to the attack on Iran, the chance of a policy rate cut before the summer has fallen from over 75% to 40% within a few weeks, according to data collector Fedwatch. Most economists now assume that the Federal Reserve won't cut the policy rate until September. It therefore appears that the relatively high US interest rate will benefit the dollar for much longer than anticipated earlier this year.

Good currency policy
For now, the currency world is facing an almost as painfully wrong-footed situation in 2026 as it was twelve months ago. At the time, expecting Trump to boost economic growth, parties had positioned themselves for a dollar appreciation. Instead, the currency plummeted due to the unpredictable US trade policy. With a more pro-Trump Fed chairman in Kevin Warsh in mind, the dollar's decline seemed poised to continue into 2026. However, the war in Iran has put an end to that scenario. The most important lesson in developing a sound currency policy is that flexibility and protection are more important than devising rosy scenarios.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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