May 2026
The USD has remained well-above pre-war levels, supported in part by the
perception that the currency has been a relative safe haven for investors
during the crisis especially versus commodity importers such as euro, sterling
and yen. USD’s appeal has been further reinforced by the view that the United
Sates, as a major energy exporter, may be shielded from the oil price surge
triggered by the conflict. At the same time, fear of an Iran-related energy
shock has raised concerns about global inflation, prompting an expectation that
many central banks including the Fed could tighten monetary policy (lift
interest rates) —
development that continues to underpin the dollar’s strength.
A rise in US inflation at the fastest pace in 3 years in April
reaffirmed the expectation that the Fed may raise interest rate by the end of
this year or early next year acted as a tailwind for the USD. Lower
geopolitical uncertainty tends to reduce the demand for the dollar as a
safe-haven liquidity asset. In contrast, periods of heightened tension tend to
support the USD due to its defensive appeal. When confidence improves amid
prospects for negotiations, demand for USD will moderate.
April 2026
The USD’s safe haven appeal was reinforced by the Iran conflict supported by the belief that US economy is a major energy exporter and US economy is relatively insulated from the surge in oil price relative to Eurozone and Japanese economy.
Rising energy prices and hence higher inflation forecast are keeping USD stronger with even the possibility of another rate hike floating. Even without rise in interest rates again, delaying interest rates cuts is enough to support USD. Rising Treasury yield is attracting investors and making them reduce risk-taking, which also helps USD. However, if the Middle East tensions ease and energy prices fall, USD can weaken as a result. USD will also weaken when the US economic data show clear signs of weakness. USD can go up if Middle East tensions worsen again, but it would likely to take a significant escalation to trigger a sustained rebound for the dollar.
March 2026
USD should initially benefit from the spike in geopolitical risk. However, the durability of any USD strength will depend on macro backdrop and how the risk sentiment develops. Fundamentals are improving for USD. Resilient US growth and sticky inflation can slow down the expected rate cut. However, continued increase in deficits and a push for lower rates combined with slowing growth are potential headwinds to the USD. A stronger USD would make emerging market currencies depreciate, especially high-yield or commodity-linked currencies.
US dollar index climbed reflecting that investors favor USD amid rising yields and geopolitical uncertainty. Higher yields across the US curve due to concerns about energy-driven inflation helped to underpin the demand for USD.
However, structural reasons for dollar weakness still remain – deteriorating labour market, potential expectation of Fed cut in the second half of this year, oil price normalizing from extreme levels, and long-term trend of central banks diversifying away from dollar reserves.
February 2026
Dollar fell against major peers due to Trump’s unpredictable policy-making, political pressure on the Fed to lower interest rates, tax cut that has deepened US deficits. USD weakened despite the rise in Treasury yields.
Weaker dollar will boost US exports and promote US manufacturing sector. On the flipside, it makes imports more expensive for the US consumers. Weaker dollar helps the US government to pay off the debts. Gradual weaker dollar can promote growth and exports. However, sharply weaker dollar could ultimately lead to investors questioning the merits of investing in the US, which may lead to capital flight. Increase in hedge activities (foreign investors hedging the currency risk on the US investment) can also put downward pressure on USD as well.