Sudden change in the wind! Under the shadow of war, the dollar surges wildly, and Wall Street shorts are being wiped out. Are your $BTC and $ETH still safe?

Market observers point out that the dollar is experiencing its strongest single-month performance since last July. The Bloomberg Dollar Spot Index has risen more than 2% since March, a reversal that surprised many Wall Street institutions. Just recently, the dollar had just ended a four-month declining streak.

Geopolitical conflicts in the Middle East are the core drivers of this shift. They have led to two direct consequences: soaring energy prices and a rapid cooling of market expectations for Federal Reserve rate cuts. These two forces have pushed the dollar higher, sharply contrasting with market sentiment prior to the outbreak of conflict.

This round of rebound has caught shorts off guard. JPMorgan’s strategists have turned bullish on the dollar for the first time in a year. Futures market speculators are also quickly pivoting, moving from the largest short position in nearly five years in mid-February to betting on a rise in the dollar. Standard Chartered’s head of G10 FX research, Steven Englander, commented that the dollar shorts established at the beginning of the year were caught by surprise.

Entering this year, mainstream views from firms like Goldman Sachs and Deutsche Bank generally predicted a weaker dollar, based on a continued rate-cutting cycle by the Federal Reserve. Historical data seemed to support this assessment— the Bloomberg Dollar Index fell approximately 8% last year, marking the largest annual decline since 2017.

However, geopolitical events have completely changed the narrative. Steven Englander maintains his bullish outlook from the beginning of the year, predicting that the dollar will rise to around 1.12 against the euro by the end of the year, stronger than the current level of about 1.15. Data from the options market also corroborates this strength, with positions betting on a stronger dollar in the next twelve months dominating during Friday’s London trading session.

Some analysts point out that the tightness in energy spot markets has led to persistent buying of the dollar. The immediate demand for physical oil has directly translated into an immediate demand for dollars, while the capital flow’s return effect has further strengthened the dollar’s position.

Despite the dollar’s short-term strength, many institutions remain cautious about revising predictions, primarily due to the uncertainty surrounding the duration and ultimate direction of the conflict. Jayati Bharadwaj, head of foreign exchange strategy at TD Securities, wrote in a report that the current risk environment favors the dollar, and if the conflict escalates, the firm will turn bullish.

However, she also stated that if both sides of the conflict reach a peace agreement in the coming weeks, the dollar may weaken. She believes that in such a scenario, the relative advantage of U.S. economic growth will diminish, the risk premium will shrink, and recent U.S. policies may trigger “hedging against the U.S.” trades that will pressure the dollar.

Erica Camilleri, senior global macro analyst at Manulife Investment Management, also maintains a mid-term bearish stance on the dollar, although the firm has closed its dollar short positions this month. Her reasoning is that the pessimism surrounding growth outside the U.S. has been overly exaggerated, and the Federal Reserve still has room to cut rates. She continues to expect the euro to appreciate before the end of the year.

Beyond the short-term market dynamics, this conflict has also reignited a deeper discussion: Is the long-term dominance of the dollar under threat? Deutsche Bank noted in a report this month that the war is testing the dollar’s status as the global currency for oil trade and mentioned the potential trend of increased use of the renminbi.

Broader concerns are that the war may trigger anxiety about the trajectory of U.S. finances, leading to a gradual withdrawal of funds from the U.S. market and dollar assets. However, Goldman Sachs strategists pointed out this week that once market attention shifts to the risks of high energy costs dragging on economic growth, it may suppress the overall appreciation of the dollar against G10 currencies. Morgan Stanley’s view is more direct, suggesting that as economic concerns mount, the dollar will weaken.

Elias Haddad, global market strategist at Brown Brothers Harriman, summarized that relative macro fundamentals have taken a backseat, with war-related headlines dominating market direction. He expects the dollar’s downward trend to eventually resume and emphasizes that this is a tactical market that requires quick reactions.

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