The dollar's modest rebound since the U.S.-Israeli war on Iran started a little over a month ago will fade as its safe-haven appeal erodes, according to currency strategists in a Reuters poll who stuck to their long-held view the currency will weaken.
Traditional safe havens have generally faltered, with U.S. Treasury yields markedly higher and gold slipping over 10% since the conflict started. The greenback has risen only about 2% against a basket of major peers, driven early on by short-covering from deep net-short positions. , (.DXY)
The dollar's safe-haven status was already under pressure from chaos around U.S. tariff policy and concerns around Federal Reserve independence that haven't gone away.
A rising risk premium - additional compensation demanded for higher inflation - has also wiped out Fed interest rate cut bets this year and broadly weighed on riskier assets.
In the meantime, markets have hung on U.S. President Donald Trump's every word as he swings between war escalation and de-escalation, with volatility spiking across asset classes.
Medians from nearly 70 FX analysts polled March 27-April 1 showed the euro holding its current $1.16 rate at end-April and end-June before strengthening about 2% to $1.18 in six months and another 2% to $1.20 in a year.
"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," said Steven Englander, global head of G10 FX research at Standard Chartered.
"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."
Oil has eased from an early-March peak of $119.50 - around 65% higher than pre-war levels - to about $104 a barrel, still up over 40% and stock markets rallied on Wednesday.
Derek Halpenny, MUFG's head of global markets research EMEA, agreed. "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."
"The safe-haven status of the dollar has been undermined to a degree," he added.
Higher energy prices are also expected to take a toll on an already-slowing U.S. economy and may cap any further gains 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," said Erik Nelson, head of G10 FX strategy at Wells Fargo.
"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."
