(Bloomberg) — The dollar is on track for its best month since July as the conflict in the Middle East scrambles Wall Street’s playbook for the world’s dominant reserve currency.
The Bloomberg Dollar Spot Index is up more than 2% in March, buoyed by haven flows and diminished expectations for Federal Reserve interest-rate cuts after the war caused energy prices to soar.
It marks a sharp reversal for the greenback, which on the eve of the conflict had just logged its fourth straight losing month. As the hostilities drag on, it’s ramping up pressure on banks and investors who’ve had a dim view of the currency’s prospects.
JPMorgan Chase & Co. strategists, for example, turned bullish for the first time in a year. In the futures market, speculators flipped to betting on greenback gains, whereas in mid-February they were the most bearish in about five years.
“The short dollar positions of early 2026 were caught offsides,” said Steven Englander, head of G-10 foreign-exchange research at Standard Chartered Bank.
With traders dumping short bets and energy prices elevated, Englander is sticking to his forecast for further dollar gains, which he held coming into 2026. He sees it reaching about $1.12 per euro by year-end, its strongest since May, from around $1.15 now.
Firms including Goldman Sachs Group Inc. and Deutsche Bank AG came into the year forecasting losses for the US currency, based in part on the projection that the Fed would keep easing in 2026.
The Bloomberg dollar gauge sank roughly 8% in 2025, the most since 2017. Three Fed rate cuts last year eroded demand, but so did President Donald Trump’s trade war, which sparked speculation around a possible flight from US assets. As it turned out, investors kept piling in, while hedging the threat of dollar declines.
One overarching risk is that the war reignites talk of a potential long-term move away from US markets and the dollar — whether out of concern around the administration’s policies or heightened angst over the nation’s fiscal trajectory as a result of spending on the war.
The greenback’s position at the center of the global financial system has been unrivaled for decades. But Deutsche Bank wrote this month that the war is testing its role as the currency for the world’s oil trade, citing a potential shift to using more Chinese yuan.
A more immediate focus, however, is whether the market’s attention swings toward the risks to economic growth from a prolonged stretch of high energy costs. That’s even as the US is seen as being relatively insulated given its position as an oil producer. If it happens, expectations for Fed rate cuts could reemerge.
A shift toward growth worries, Goldman Sachs strategists wrote this week, “would likely temper broad dollar appreciation” against G-10 currencies. Morgan Stanley went a step further, writing that the dollar will weaken as economic concerns build.
Many firms have held off on updating forecasts given the lack of clarity around the war’s duration, and whether the tensions will mount or give way to a peace accord.
Jayati Bharadwaj, head of FX strategy at TD Securities, wrote in a note this week that the dollar should benefit in the current risky environment, and an escalation in the fighting would lead the bank to adopt a bullish bias.
But she’s reluctant to revise her bearish projection as she sees scope for the greenback to weaken if the US and Iran negotiate a peace deal in the coming weeks.
“In that scenario, fading US growth exceptionalism, a reduced safe-haven premium, and a potential intensification of the ‘Hedge America’ trade following recent US actions would all weigh on the dollar,” she wrote.
At Manulife Investment Management, Erica Camilleri is also a dollar pessimist, even as the firm exited dollar shorts this month.
She cited “overblown pessimism” about growth outside the US, and the potential for the Fed to lower rates, something she sees no other central bank doing this year.
“We remain biased towards dollar depreciation over the medium-term and still see euro appreciation by year-end,” said Camilleri, a senior global macro analyst.
For now, however, the bulls are in the driver’s seat. On Thursday, the dollar and oil climbed and stocks tumbled on doubts over whether the two sides can reach a ceasefire. The greenback gave back some gains late in the day after Trump extended his deadline for Iran to reopen the Strait of Hormuz until April 6.
In the options market, bets on dollar gains were dominating the outlook for the next month as of Thursday afternoon in New York, even though positioning for the one-year period shows that expectations are for the strength to fade.
What Bloomberg Strategists say…
A spot energy crunch creates a sustained bid for dollars, as the immediate need for physical barrels translates directly into immediate demand for USD to transact, strengthening the currency at the same time as capital flows recycle back into dollar assets.
—Brendan Fagan, macro strategist, Markets Live.
For the full analysis, click here.
“The relative global macro environment has taken a backseat to war-related headlines,” said Elias Haddad, global head of markets strategy at Brown Brothers Harriman, which expects the dollar downtrend to eventually resume.
“This is a tactical market now,” Haddad said. “You have to be swift.”
–With assistance from George Lei.
More stories like this are available on bloomberg.com
