The euro stabilized above $1.12 against the dollar Friday after European Central Bank officials signaled that the energy price shock from the Strait of Hormuz crisis has materially altered the rate-cut calculus for 2026, with ECB board members suggesting the previously projected three rate cuts this year could be reduced to one—or none.
ECB chief economist Philip Lane said in a speech Thursday that the bank is monitoring energy pass-through effects on core inflation "extremely closely" and that the Governing Council will need to see several months of declining energy prices before resuming its easing cycle. Eurozone headline CPI climbed back to 3.1% in March from 2.3% in January.
Dollar Dynamics
The dollar has declined roughly 10% against a basket of major currencies since the start of 2026, reflecting growing concerns about the US fiscal trajectory, the legal uncertainty surrounding tariffs after the Supreme Court ruling, and the relative resilience of European growth in sectors insulated from Middle East energy exposure.
"The dollar is weaker, but it's still by far the world's reserve currency," said Deutsche Bank's global head of FX strategy. "Predictions of dollar collapse have consistently underestimated the institutional inertia embedded in global dollar usage."
Pound Outperforms Amid UK Growth Surprise
The British pound outperformed all major currencies this week after UK GDP data showed a surprise 0.5% monthly expansion in February, driven by a booming services sector. The Bank of England is now expected to hold rates steady until at least September.
Japanese yen continued to strengthen modestly as the Bank of Japan maintained its cautious policy normalization stance. The yen's status as a safe-haven currency has been reinforced during the Hormuz crisis, with the currency gaining nearly 6% against the dollar since February.