The US dollar is on track for its best monthly performance since July as Middle East conflicts disrupt Wall Street's currency outlook.

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Source: Global Markets Newsroom

The U.S. dollar is on track for its best monthly performance since July. The conflict in the Middle East has disrupted Wall Street’s trading strategy for this world’s main reserve currency.

The Bloomberg Dollar Index rose more than 2% in March, driven by flows into safe-haven assets. And as the war pushed oil prices sharply higher, markets scaled back expectations for Federal Reserve rate cuts.

This marks a sharp reversal in the dollar’s trend. Ahead of the outbreak of the conflict, the dollar had just posted declines for a fourth consecutive month. With hostilities ongoing, pressure on banks and investors that had been previously pessimistic about the dollar’s outlook has intensified.

Take JPMorgan Chase as an example. For the first time in a year, the firm’s strategists turned bullish on the dollar. In the futures market, speculators have shifted to betting on the dollar rising, while in mid-February their short positions were still at about the highest level in roughly five years.

“The dollar’s short positions heading into early 2026 were an opportunity seized by the other side,” said Steven Englander, head of G-10 FX research at Standard Chartered.

As traders cut back on their short bets and energy prices stayed elevated, Englander stuck with his forecast for further dollar strength—one he had formed when entering 2026. He expects the dollar-to-euro exchange rate to reach around 1.12 by year-end, which would be the highest level since May. The exchange rate is currently trading around 1.15.

A sluggish start

Institutions such as Goldman Sachs and Deutsche Bank had already expected the dollar to fall when they looked ahead to this year’s outlook, partly because they were basing their view on forecasts that the Federal Reserve would continue to ease monetary policy in 2026.

The Bloomberg Dollar Index fell about 8% in 2025, the largest drop since 2017. Three rate cuts by the Federal Reserve last year weakened demand for the dollar. The trade war launched by President Donald Trump also sparked speculation that funds could flee U.S. assets. But the actual outcome was that investors continued pouring in—even as hedging threatened to undermine any dollar depreciation.

One key risk is that the war could reignite discussions about the long-term shift away from U.S. markets and the dollar—whether driven by concern over government policy or heightened anxiety about the direction of public finances as war spending grows.

The dollar’s dominance in the global financial system has been unrivaled for decades. But Deutsche Bank wrote this month that the war is testing its role as the world’s oil-trading currency, and suggested that there may be a greater future shift toward using the renminbi.

For now, though, the more pressing question is whether the market attention will turn to the risk that persistently high energy costs pose to economic growth. Even if the U.S., as an oil producer, is widely seen as being affected relatively less, this risk still exists. If that were to occur, expectations for Federal Reserve rate cuts could heat up again.

Goldman strategists wrote this week that if concerns shift toward growth, “it could cap the overall upside for the U.S. dollar versus G-10 currencies.” Morgan Stanley went even further, saying the dollar would weaken as economic worries intensify.

Forecast freeze

Given that the duration of the war is still unclear, and it is also uncertain whether tensions will worsen or end with a peace agreement, many companies are holding off on updating their forecasts.

Jayati Bharadwaj, head of FX strategy at TD Securities, wrote in a report this week that the dollar should benefit in the current risk-filled environment, and that an escalation in the conflict would prompt the company to take a bullish stance.

But she is somewhat hesitant to revise her pessimistic forecast, because she believes that even if the U.S. and Iran reach a peace agreement within the next few weeks, there is still room for the dollar to weaken.

She wrote, “In this case, the idiosyncrasies of U.S. economic growth would gradually fade, the safe-haven premium would decline, and recent U.S. actions could intensify ‘hedge against the U.S.’ trades—all of which would put pressure on the dollar.”

Erica Camilleri, a senior global macro analyst at Manulife Investment Management, is also pessimistic about the dollar, even though the firm has already closed its short-dollar positions this month.

She noted that there is an “overly pessimistic” view of economic growth outside the United States, and that while the Federal Reserve may lower interest rates, she believes no other central bank would do so this year.

“We still lean toward dollar depreciation over the medium term, and we expect the euro to appreciate by the end of the year,” Camilleri said.