Oil prices fell sharply on Tuesday despite heightened tensions in the Middle East, as markets bet on a possible diplomatic breakthrough between the United States and Iran even after Washington moved to block Iranian ports.
Brent crude dropped 2.7% to $96.66 a barrel, while US crude slid 3% to $96.13, with traders weighing signs that talks could still resume following the collapse of weekend negotiations.
Sources told Reuters that both sides have kept the door open to dialogue, while a US official pointed to forward movement towards a potential agreement.
The United States has continued to engage Tehran even as its military enforced a blockade of Iranian ports, a move aimed at increasing pressure after talks failed to deliver a deal.
US President Donald Trump said on Monday that Iran had “called this morning” and “they’d like to work a deal”, although the claim could not be independently verified.
“The failed weekend talks did not produce a deal, but they also did not close the door on diplomacy, and that is enough for equities to keep pushing higher for now,” said Charu Chanana, chief investment strategist at Saxo.
Reflecting that optimism, Asian equities advanced in early trade. MSCI’s broadest index of Asia-Pacific shares outside Japan rose 1%, while Japan’s Nikkei and South Korea’s Kospi each gained more than 2%.
Futures also pointed to a steady global outlook, with Nasdaq futures up 0.13%, S&P 500 futures flat, EUROSTOXX 50 futures rising 0.63%, and DAX futures adding 0.77%, following an overnight rally on Wall Street.
The US dollar, often seen as a safe haven, weakened alongside oil as investors shifted towards riskier assets.
“Markets are trading hope, not resolution,” said Chanana.
Analysts said Washington’s blockade strategy could shift pressure onto Tehran without immediate escalation on the ground.
“The US has actually played that trump card… it’s now forced the Iranians back to the drawing board,” said Tony Sycamore, a market analyst at IG.
Dollar on backfoot
The dollar fell to a 1-1/2-month low of 98.328 against a basket of currencies on Tuesday, as buoyant risk sentiment dampened demand for the world’s reserve currency.
That left the euro trading 0.05% higher at $1.1764 while sterling GBP= rose to a more than six-week peak of $1.3514.
“The US and Iran have started to walk down the path of coming up to an agreement,” said Joseph Capurso, a strategist at Commonwealth Bank of Australia.
However, “the markets are still facing a global economic outlook that is deteriorating, and I think the risks are high that you get equity markets and credit markets and the like fall again, and that would push up the US dollar against probably all currencies.”
US Treasury yields were little changed, with the two-year yield last at 3.7722% while the benchmark 10-year yield stood at 4.2854%.
The inflationary pulse from the steep rise in energy prices has prompted investors to prepare for the possibility that a number of major central banks will lean towards raising rates, marking a sharp reversal from expectations before the war for rate cuts or a prolonged pause.
Elsewhere, spot gold was up 0.7% at $4,771.81 an ounce.