The recent decline in global energy prices is easing inflationary pressures worldwide despite the US dollar reaching its strongest level in over a year against major currencies. The dollar’s appreciation, driven by mounting expectations of higher US interest rates, typically fuels imported inflation by increasing the cost of goods priced in dollars. However, this effect is currently being offset by a sharp fall in oil and natural gas prices following progress in US-Iran peace negotiations.

The 60-day interim agreement between the United States and Iran has led to increased oil shipments through the Strait of Hormuz, reviving global energy supplies and prompting a swift reduction in fuel costs. European natural gas prices have plummeted by 45 percent from their peaks during the recent conflict escalation, while Brent crude oil futures dropped more than 40 percent, falling below $80 per barrel for the first time since hostilities began in February. US crude oil prices are approaching $70 per barrel. This contrasts starkly with the situation just a month ago, when oil had surpassed $100 a barrel amid speculation it could reach $150.

The rapid retreat in energy prices is alleviating the inflation risk that had intensified alongside the strengthening dollar. Analysts note that oil, which had been a significant driver of inflation, is now returning to its previous role as a mild disinflationary force. In the United States, the year-on-year change in crude futures briefly turned negative, signaling a potential easing of energy-related price pressures.

This shift has prompted economists at Nomura and RBC Capital Markets to revise down their expectations for interest rate hikes by the European Central Bank. Nomura forecasts two rate increases in the coming months, while RBC projects only one, citing a material improvement in inflation conditions. Market indicators reflect this shift as well: one-year euro zone inflation swap rates have declined from nearly 3.9 percent a month ago to about 2.45 percent, with the five-year rate also dropping closer to the ECB’s 2 percent target.

The United Kingdom has seen a similar trend, with two-year inflation swap rates—key to fixed mortgage pricing—returning to levels before the Iran conflict. Consequently, the futures market now anticipates just one Bank of England rate hike this year, down from three earlier in the year.

Despite the sustained strength of the US dollar, the easing of energy costs is reducing pressures on monetary authorities to tighten policies aggressively or intervene in currency markets. In Japan, for example, the yen remains near a 40-year low against the dollar, hovering just above 162 yen per dollar. Unlike previous episodes of rapid dollar appreciation, recent oil prices have remained well below wartime highs, lessening the urgency for intervention. Japanese finance minister Satsuki Katayama’s recent warnings about currency market moves have so far not led to action, reflecting this changed context.

Central banks in several countries, including the European Central Bank, Reserve Bank of Australia, and Norges Bank, have continued raising interest rates to manage inflation. Some emerging markets have taken more drastic steps: Bank Indonesia implemented an emergency rate hike, Sri Lanka’s central bank raised rates by 100 basis points in May, and the Reserve Bank of India has actively intervened to stabilize its currency.

With energy prices retreating, these policy pressures are beginning to alleviate, providing policymakers globally with some relief amid ongoing challenges posed by the strong dollar.