US dollar nudges lower on hopes of Middle East de-escalation

LONDON/NEW YORK, March 4 (Reuters) – The U.S. dollar slipped on Wednesday, pulling back from the multi‑month highs it touched in the previous session, as investors unwound safe‑haven positions on rising hopes that the Middle East conflict may prove shorter‑lived than initially feared.

Improved sentiment was underpinned by a New York Times report on Wednesday that Iran’s Ministry of Intelligence had signalled to the U.S. Central Intelligence Agency a willingness to explore talks to end the war, citing officials briefed on the matter.

The report lifted risk appetite and weighed on the dollar.

“Investors are seeing light at the end of the tunnel for the conflict in the Middle East and are unwinding short positions on the currencies most exposed to a sustained commodity-price shock,” said Karl Schamotta, chief market strategist, at Corpay in Toronto.

“Reports of back-channel communications between U.S. and Iranian intelligence organizations are pairing with President Trump’s apparent backpedaling on earlier demands for regime change to reduce the likelihood of a wider regional conflagration.”

In mid-morning trading, the euro edged up 0.1% at $1.1623, having hit its weakest level since late November on Tuesday. That followed data released on Tuesday that showed euro zone inflation accelerated more quickly than expected in February, before the start of the Iran conflict.

The dollar index, which tracks the U.S. currency’s performance against six others, dipped 0.1% to 98.93, having earlier reached its strongest level since November 28. Against the yen, the dollar fell 0.3% to 157.25 yen. On Tuesday, the greenback had ascended to its highest since January 23, when the New York Federal Reserve reportedly conducted rate ​checks on the dollar/yen pair.

With the Iran war, U.S. economic data on Wednesday took a back seat.

The dollar showed little reaction to data showing U.S. private payrolls increased by the most in seven months in February, though data for the prior month was revised sharply lower.

Private employment rose by 63,000 jobs last month, the largest gain since July 2025, after a downwardly revised 11,000 increase in January.

A report showing U.S. services sector activity surging to more than a 3-1/2-year high in February also had marginal impact on the currency market.

The Institute for Supply Management said its nonmanufacturing purchasing managers index increased to 56.1 last month, the highest reading since July 2022, from 53.8 in January. Economists polled by Reuters had forecast the services PMI easing to 53.5.

OPTIONS MARKET SIGNALS EURO WEAKNESS

The options market shows traders are at their most bearish towards the euro in at least a year, having flipped from an overwhelmingly bullish position just six weeks ago.

“And here in Europe, it’s all about the natural gas prices,” CIBC Capital Markets head of G10 FX strategy Jeremy Stretch said. “If there comes to be more of a supply, as well as a price, issue, then obviously that becomes much more problematic for the euro zone.”

The cost of buying options to sell the euro against the dollar over the next three months relative to the cost of options to buy it is at its largest premium since March last year, according to LSEG data. That reflected a view in the options market that the euro has further to fall.

Deutsche Bank global head of FX research George Saravelos said in a note on Tuesday that for every combined 10% rise in Brent and European natural gas prices, the euro loses around 0.8% in value.

“This means that a combined move to $100/barrel in both Brent and (natural gas futures) would take euro/dollar down to roughly $1.13 on current sensitivities,” he said in his note.

Global oil and gas prices have jumped as the strikes on Iran disrupt energy exports from the Middle East, with Tehran’s attacks on ships and energy facilities in response closing navigation in the Gulf and forcing production stoppages from Qatar to Iraq.

U.S. crude futures were last up 0.3% at $74.81 per barrel.

Elsewhere, the pound was slightly higher on the day $1.3363. On Tuesday, it touched its weakest level since December. Sterling has been hit hard by the prospect of a protracted rise in energy prices given that British inflation, at 3%, is still well above the Bank of England’s 2% target.

Against the Chinese yuan, the U.S. currency slid 0.2% to 6.9008 in offshore trade, after PMI data for February diverged, with official gauges recording a slump in activity even as a private-sector counterpart blew past estimates.

Bitcoin also recovered, along with other risk-sensitive currencies, hitting a one-month peak. It was last up 6% at $72,182.

(Reporting by Amanda Cooper in London and Gertrude Chavez-Dreyfuss in New York; Additional reporting by Gregor Stuart Hunter in Singapore; Editing by Jacqueline Wong, Muralikumar Anantharaman, Shri Navaratnam and Alex Richardson)