Currency analysts are forecasting that the American dollar’s slight strengthening since the U.S.-Israeli conflict with Iran commenced more than a month ago will soon reverse course, as the greenback loses its traditional status as a crisis refuge.
According to a recent Reuters survey of nearly 70 foreign exchange experts conducted between March 27 and April 1, the dollar’s safe-haven reputation continues to deteriorate amid ongoing concerns about U.S. trade policy uncertainty and questions surrounding Federal Reserve autonomy.
Conventional crisis assets have performed poorly during this conflict, with Treasury bond yields climbing significantly and gold prices dropping more than 10% since hostilities began. The dollar has managed only a modest 2% increase against other major currencies, primarily due to investors closing out short positions.
Steven Englander, who leads global G10 currency research at Standard Chartered, explained the administration’s impact on market confidence. “For a lot of the surprise policy moves by the Trump administration, there’s a direct impact, but the indirect impact has almost always been to increase the risk premium on U.S. assets by increasing the range of uncertainty about the sets of policy reversals he’s willing to pull,” Englander stated.
He noted the lack of genuine enthusiasm behind recent dollar purchases, adding, “But I don’t see much of the recent dollar-buying as enthusiastic. What strikes me is whenever there is a hope they’ll come to a resolution, you see the dollar sell off very quickly. As soon as things normalize and say, oil goes back below $90, euro-dollar would be above $1.18 before you could snap your fingers, which might be true if it happened tomorrow.”
Market volatility has intensified as traders react to President Trump’s shifting rhetoric between military escalation and diplomatic solutions. Meanwhile, expectations for Federal Reserve interest rate reductions have evaporated due to rising inflation risk premiums, putting additional pressure on riskier investments.
The survey’s median projections show the euro maintaining its current $1.16 exchange rate through April and June, before appreciating roughly 2% to $1.18 within six months and climbing another 2% to $1.20 over the next year.
Derek Halpenny, MUFG’s head of global markets research for Europe, Middle East and Africa, observed that the dollar’s response has been surprisingly weak given the circumstances. “You’d have expected to see a 4-5% strengthening of the dollar based on a 60-70% jump in crude oil prices alone. But that’s not what we’ve had so far, it’s been far more modest,” Halpenny said. “The safe-haven status of the dollar has been undermined to a degree,” he added.
Oil prices have retreated from their early March high of $119.50 per barrel – representing a 65% increase from pre-war levels – to approximately $104, though this still reflects a 40% gain. Stock markets showed signs of recovery on Wednesday.
Erik Nelson, Wells Fargo’s head of G10 currency strategy, outlined his bearish outlook for the greenback. “We’re bearish on the dollar for a couple of reasons. One, the dollar’s trading rich versus its fair value and the very sharp and sudden shift toward dollar-longs now looks pretty stretched,” Nelson explained.
He emphasized broader economic concerns, stating, “The other is this notion the U.S. is far more immune to the crisis than Europe or Japan or others. While that may be true in terms of energy imports, there are still going to be massive ripple effects in the U.S. from higher energy prices. Add to that an already-weak labor market backdrop and this is only going to exacerbate real income issues for consumers.”
Rising energy costs are anticipated to further burden an already slowing American economy, potentially limiting any additional gains for the dollar in the near term.
