News of the week summary - 15/06/2025
War between Israel and Iran raises oil market tensions
The recent military escalation between Israel and Iran has sharpened fears of a broader conflict threatening the Middle East’s vital energy infrastructure, raising alarm among oil traders about possible disruptions to global supply. Over the weekend, Israel launched targeted strikes on Iranian gas processing plants and fuel depots, aiming at infrastructure supporting Iran’s domestic energy consumption rather than its oil exports. These included facilities linked to South Pars, the world’s largest gas field, which is shared with Qatar. Production at one offshore platform was briefly halted, though reports confirmed that critical export operations remained unaffected. In Tehran, fuel storage tanks were also hit, but the damage was limited, and fires were contained.
This strategic targeting suggests Israel is seeking to destabilize Iran’s internal energy supply and weaken its economy without provoking an immediate international market shock. However, it is a risky move that increases the chances of retaliation. If Iran were to respond by targeting oil facilities in neighboring Gulf states or obstructing the Strait of Hormuz, a narrow waterway through which one-third of the world’s seaborne oil passes, the global impact would be severe. Although Iran has often threatened to close the strait in the past, doing so would also harm its own interests, especially its critical oil exports to China. Yet, targeted disruptions, such as attacks on tankers or key terminals, remain possible and could push oil prices sharply higher.
Markets responded swiftly but not overwhelmingly: Brent crude jumped 12% to $78.5 per barrel immediately following the strikes, but then settled back to $75 as traders judged the current threat to physical supply as limited. Still, geopolitical risk is now firmly priced into oil. Analysts warn that if Iran escalates with direct attacks on infrastructure or oil exports, prices could spike by $20 or more. The risk premium, which reflects how much investors are willing to pay to hedge against disruptions, has become a central driver of oil prices this week, even though the fundamentals of supply and demand would suggest lower prices.
Meanwhile, Israel’s own energy system has come under strain. Iranian missiles damaged transmission lines to a key refinery in Haifa, and the country temporarily shut down two of its gas fields as a precaution. As Israel relies on natural gas for around 70% of its electricity generation, this raises domestic energy security concerns.
In the background, the global oil market had been weakening since March. The anticipation of economic slowdown due to newly imposed tariffs by U.S. President Donald Trump, coupled with OPEC+’s plans to unwind production cuts and restore output, had been pushing prices downward. The Saudi-led OPEC+ group is currently in the process of adding over 2 million barrels per day of supply between April and September. This spare capacity acts as a buffer, theoretically allowing the group to compensate for any sudden supply shock. However, OPEC+ has shown no signs yet of tapping into emergency reserves or adjusting its current output schedule in response to the tensions.
Dollar falls to 3-Year low
The U.S. dollar has fallen to its weakest level since March 2022, dragged down by a combination of rising trade tensions, softer inflation data, and growing investor concerns over America’s geopolitical stance and fiscal position. The immediate catalyst was President Trump’s announcement that he would soon notify trading partners of new tariff rates, as a 90-day pause on reciprocal trade levies nears its end. This signals a possible intensification of the trade war rhetoric, reigniting fears of economic disruption tied to protectionist policies.
As the dollar dropped over 1% against a broad basket of currencies, its steepest decline in months, it breached levels seen after Trump’s earlier tariff announcements in April. The currency’s broad depreciation reflects a growing belief among investors that geopolitical instability and economic uncertainty are beginning to weigh heavily on U.S. assets.
Markets are particularly sensitive to renewed trade hostilities. Higher tariffs typically reduce global trade flows and slow economic growth. When these tariffs are reciprocal, meaning countries retaliate with their own levies, it can trigger a tit-for-tat escalation that weakens investor confidence. In this case, the dollar is suffering because of fears that U.S. trade partners will respond in kind, possibly targeting key American exports.
Geopolitical developments added further pressure. The Pentagon’s reassessment of the 2021 AUKUS submarine agreement with the UK and Australia raised concerns about weakening strategic alliances, especially in the Indo-Pacific. For currency markets, this matters: global investors prefer to park their capital in politically stable countries with reliable alliances. A perceived weakening of U.S. geopolitical leadership can deter foreign investment, reducing demand for the dollar.
At the same time, inflation data released this week came in lower than expected. This increases the likelihood that the Federal Reserve could cut interest rates sooner than previously anticipated. Lower rates reduce the return investors can earn on dollar-denominated assets, making the currency less attractive. Markets now expect at least two interest rate cuts by the Fed this year.
In contrast, the European Central Bank has indicated it may soon end its own rate-cutting cycle, which has pushed the euro higher. The euro rose nearly 0.8% to 1.16$, reaching levels not seen since late 2021, as the interest rate gap between the U.S. and Europe narrows.
This confluence of factors (renewed trade threats, soft inflation, reevaluation of U.S. foreign policy, and a more dovish Federal Reserve) has caused the dollar to lose almost 10% of its value since the beginning of the year. The drop reflects not just a shift in monetary policy expectations, but also deeper unease about the direction of U.S. economic policy. Added to the mix is a growing U.S. budget deficit and speculation about potential tax hikes on foreign investment income, which would further deter global capital flows into the U.S.
Trump declares US-China trade truce
President Donald Trump declared that the US and China had reached a new trade truce following two days of intense negotiations in London. The deal revives an earlier agreement made in Geneva but which had quickly faltered due to disagreements over rare earth exports and American export controls. Trump announced on Truth Social that the deal was “done,” though subject to final approval in a meeting with Chinese President Xi Jinping. He highlighted China’s promise to supply rare earths “up front” and said the US would uphold its commitments, including continued access for Chinese students to American universities.
The truce attempts to address the core issue of access to rare earth materials, which are essential to US defense and tech industries. A White House official suggested that restrictions on semiconductor exports could be eased if China fulfills its side of the agreement. If implemented, such a change would signal a shift away from the previous administration’s hardline approach, which aimed to contain Chinese military tech development.
Chinese Vice-Minister of Commerce Li Chenggang described the talks as rational and candid. According to Chinese state media, the sides agreed to implement the understandings reached in Geneva and in a phone call between the two leaders last week. Both countries had previously committed to slashing tariffs by a combined 115 percentage points and gave themselves a 90-day window to make progress.
That window remains in place, and significant hurdles still threaten the deal’s stability. The original Geneva truce collapsed quickly after the US accused China of failing to accelerate rare earth exports, while Beijing criticised new American tech restrictions. May data showed a steep decline in Chinese exports to the US, falling at their fastest annual rate since the early pandemic.