The Iran situation is only a short-term boost for the dollar; once geopolitical risks subside, a reversal to a downward trend is likely.

Supported by inflation concerns triggered by the Iran war, the dollar remains close to its year-high reached in March. Recent data shows that the U.S. economy remains resilient, which also supports the dollar.
Currently, inflation remains sticky, and the Federal Reserve is not in a hurry to cut interest rates significantly. This is favorable for the dollar but ultimately only a short-term driver. From a broader structural perspective, once the geopolitical premium caused by the Iran war dissipates, the dollar is expected to face downward pressure by the end of the year.
The U.S. is facing a textbook twin deficit problem, with both fiscal deficit and current account or trade deficit existing simultaneously. As of February, the federal budget deficit for the 2026 fiscal year was about $1 trillion. Major factors include increased debt interest payments, and by early 2026, total U.S. debt exceeded $38 trillion, with debt-to-GDP ratio over 120%.
High debt levels weaken fiscal flexibility and pose economic risks, as more resources are allocated to interest payments rather than productive investments. This encourages policymakers to limit the independence of the central bank and rely on looser monetary and fiscal policies to stimulate nominal growth. As the economy expands, the debt-to-GDP ratio will decline, but the real value of existing government bonds will shrink.
The U.S. primarily finances its deficits through the sale of Treasury bonds and holds the largest external debt in the world. Countries like China and Japan hold significant shares, accounting for about 25% of U.S. Treasury securities. Although the U.S. government is not currently facing a cash flow crisis, its heavy reliance on external capital to fill the twin deficits increases vulnerability if investor confidence suddenly shifts.
The dollar’s hegemonic status as a reserve currency lacks substantial competition, which alleviates immediate risks. The Fed’s hawkish stance, along with expectations of pausing or extending rate-hold periods to combat persistent inflation, supports the dollar.
However, if geopolitical tensions ease and current risk premiums diminish, markets may refocus on fundamentals. At that point, the ongoing deterioration of fiscal health and a faster pace of Fed rate cuts could trigger a sharp decline in the dollar, reminiscent of the steep drop since hitting a 20-year high earlier this century.
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