Barclays: The dollar rebound is a "bittersweet victory," and a geopolitical easing will trigger a correction.

Ask AI · Why did Barclays call the dollar premium a “bitter victory”?

Barclays Bank believes that for the bulls, the recent strength of the U.S. dollar looks like a feast—but it is only a “bitter victory.”

According to a note from Barclays’ research team on March 24, reports from the Trailblazing Trading Desk said: The energy-price shock triggered by an escalation in the situation in the Middle East certainly supports the U.S. dollar, but the dollar’s persistent underperformance versus the interest-rate differential-based benchmark indicates that an approximately 5% “dollar risk premium” is already deeply entrenched and unlikely to dissipate.

Once the situation in the Middle East stabilizes over the coming months and energy prices fall back, the dollar will face an unavoidable near-term weakness and pullback.

The dollar is strong, but not strong enough

The Barclays report says that after the outbreak of the Middle East–Iran conflict, the dollar demonstrated its traditional advantages—energy independence, technological leadership, and economic resilience.

Data show that for every 10% rise in oil prices, the dollar appreciates by about 0.5%–1% versus major currencies such as the euro and the British pound.

（When the oil price rises by 10%, the dollar exchange rate rises by 0.5% to 1%）

However, the dollar’s performance still falls far short of traditional benchmark indicators such as the interest-rate differential. Taking the euro-to-dollar exchange rate as an example: based on fair value measured by a 10-year real interest-rate spread, it is about 1.10, but the actual exchange rate trades around 1.15.

（Underperformance versus the interest-rate spread’s trend）

The core reason for this divergence is a persistently present “dollar premium” of roughly 5%. This premium has hovered near the threshold of one standard deviation (1-sigma) for more than a year, far above historical norms.

（Dollar premium situation）

The report defines the “dollar premium” as: the difference between the actual level of the EUR/USD exchange rate and the “fair value” calculated based on factors such as the 10-year real interest-rate spread and relative stock performance (MSCI U.S./Europe ratio).

Specifically, the report quantifies this premium through a regression model. The model regresses the EURUSD against the above multiple variables, and the “dollar premium” is the residual from this regression model.

What is supporting this premium? Barclays believes it is increasingly highly related to risk factors specific to the United States—first, uncertainty around U.S. domestic economic policy, and second, valuation volatility in the U.S. technology sector.

This premium has not been eliminated during the escalation of the Iran conflict, which means that investors currently going long the dollar are, in practice, bearing extremely high and difficult-to-predict policy communication risk.

Structural factors reshaping the dollar logic

In the past, when global risk rose, the dollar benefited from its safe-haven attributes, and the premium was often negative—meaning the dollar was “more expensive.”

But since 2025, things have reversed. U.S. domestic economic policy uncertainty has surged, and it has become positively correlated with the dollar premium. The market has started demanding compensation for the “U.S. domestic policy risk” involved in holding dollars.

****（Premium level reflects U.S.-specific policy risk）

Another driver is technology stocks. Previously, the rise in the U.S. tech sector symbolized “U.S. exceptionalism,” which was favorable for the dollar. But now, concerns about AI disruption may make gains in tech stocks negatively correlated with the dollar premium, weakening the dollar’s appeal.

（Impact of the tech sector）

Dollar outlook: a soft landing, but not a sharp drop

Based on this, Barclays provides a balanced outlook for the dollar. The current dollar is supported by high oil prices and geopolitical risk. But if the premium does not disappear even in periods when the dollar is favorable, then after the situation eases, it is likely to persist.

Therefore, assuming the conflict eases in some form within the next quarter, with oil prices falling back, the dollar will face downward pressure. At the same time, U.S. domestic agendas—for example, the midterm elections and the appointment of a new Fed chair—may keep the premium elevated.

However, thanks to AI-related capital expenditures and a favorable fiscal tailwind, U.S. economic resilience will prevent a collapse-like decline in the dollar.

But by early next year, the market may start focusing on potential fiscal gridlock after the midterm elections—if a new fiscal stimulus bill cannot pass, market expectations for growth over the last two years of the Trump administration could cool.

Overall, Barclays analysts expect that for a long time to come, EUR/USD will trade in a range after April of last year.