Dollar Index Dips 0.1% as Iran Peace Hopes Cool Rate Hike Bets, Treasury Yields Slide

The U.S. dollar weakened on May 26, 2026, as optimism over a potential U.S.-Iran peace deal reduced Federal Reserve rate hike expectations and pushed Treasury yields lower. The dollar index (DXY) slipped 0.1% to 99.16, though ongoing military tensions preserved some safe-haven demand. The benchmark 10-year Treasury yield fell 8 basis points to 4.495%, reversing a sell-off sparked by Iran’s de facto blockade of the Strait of Hormuz. CME FedWatch data showed traders lowered the probability of 25-basis-point rate increases at upcoming Fed meetings. If peace holds, the dollar may weaken further against the euro, as the European Central Bank remains inclined to hike in June while the Fed could tilt dovish, according to Macquarie strategists. In other pairs, EUR/USD edged down 0.1% to $1.1630, GBP/USD lost 0.4% to $1.3448, and USD/JPY rose 0.3% to 159.31, nearing the closely watched 160 level. Markets now look to Thursday’s core PCE inflation data, the Fed’s preferred gauge.