Dollar hits best monthly performance since July last year as Middle East conflict disrupts Forex route on Wall Street.

Due to the disruption in the Middle East conflict to Wall Street's expectations for the major reserve currencies globally, the US dollar is expected to achieve its best monthly performance since July last year. Data shows that due to the inflow of safe-haven funds and the boost from the weakening of the interest rate cut expectations by the Fed after the surge in energy prices caused by the war, the Bloomberg US dollar spot index rose more than 2% in March. This marks a sharp reversal in the US dollar trend. Just before the outbreak of the Middle East conflict, the US dollar had experienced its fourth consecutive month of decline. Middle East war drives US dollar to record monthly gain At the beginning of the year, major Wall Street banks including Goldman Sachs and Deutsche Bank predicted that the US dollar would decline, partly due to expectations that the Fed would continue to ease in 2026. Data shows that the Bloomberg US dollar index fell by about 8% in 2025, the largest annual decline since 2017. The Fed's three interest rate cuts last year weakened the demand for the US dollar, and Trump's trade war also raised concerns in the market about US assets. However, now, in the context of ongoing conflict, banks and investors who were bearish on the US dollar are facing increasing pressure. For example, Morgan Stanley's strategists have turned bullish on the US dollar for the first time in a year. In the futures market, speculators have shifted their bets to the US dollar rising - while in mid-February, speculators were the most bearish on the US dollar in about five years. Steven Englander, head of G10 FX research at Standard Chartered Bank, said, "Bearish US dollar positions at the beginning of 2026 have been completely disrupted." As traders close out short positions and energy prices remain high, Steven Englander maintains his previous prediction of further US dollar strength. He believes the US dollar will rise to $1.12 against the euro by the end of the year - currently around $1.15 against the euro - which would be the highest level since May last year. Although investors continue to buy and hedge against the risk of a US dollar decline, a key risk is that the war has reignited discussions about the possibility of long-term distancing from US markets and the US dollar - whether out of concerns about government policy or worries about the US fiscal trajectory due to war spending. For decades, the US dollar has held an unparalleled position in the global financial system. But according to Deutsche Bank this month, the war is testing its role as the global oil trading currency. Interbank forex trading and reserves still dominated by the US dollar A more direct concern is that long-term high energy costs may pose a risk to economic growth. Although the US has some defensive capabilities as an oil-producing country, if the market shifts its focus to growth concerns, expectations of a Fed rate cut may reappear. Goldman Sachs strategists pointed out this week that if the market begins to be dominated by growth concerns, "it may suppress the broad appreciation of the US dollar against G10 currencies." Morgan Stanley further predicts that as economic concerns intensify, the US dollar may weaken. Forecasts on hold Due to the uncertainty of the duration of the Middle East conflict, and the possibility of escalation or a peace agreement between the US and Iran, many institutions have not yet updated their forecasts for the US dollar. Jayati Bharadwaj, head of foreign exchange strategy at TD Securities, pointed out this week that in the current risk environment, the US dollar should benefit, and if the conflict escalates, the bank may take a bullish stance. However, she remains cautious about revising bearish US dollar forecasts, as the US dollar could weaken if a peace agreement is reached between the US and Iran in the coming weeks. She said, "In this scenario, weakening US growth advantage, declining safe-haven premiums, and recent 'anti-US' trades may all put pressure on the US dollar." Erica Camilleri, Senior Global Macro Analyst at Manulife Investment Management, also holds a bearish outlook on the US dollar, despite the company having closed out its short US dollar positions this month. She points out that over-reliance on pessimistic expectations for growth outside the US, and the potential for Fed rate cuts are important factors for the US dollar to weaken in the medium term. She said, "In the medium term, we still favor a depreciation of the US dollar and expect the euro to appreciate by the end of the year." Bulls temporarily in charge However, US dollar bulls are currently in a temporary dominant position. On Thursday, the US dollar and oil prices rose while the stock market fell, as market uncertainty lingered over whether the US and Iran could reach a ceasefire. After Trump extended the deadline for Iran to reopen the Strait of Hormuz to April 6, the US dollar gave back some of its gains at the end of the session. Options market data show that as of Thursday afternoon in New York, short-term bets on the US dollar dominated, although one-year holdings indicate that market expectations for a US dollar rally are gradually fading. Strategists say that the shortage of physical energy continues to support US dollar demand, as immediate demand for physical oil directly translates into demand for US dollar trades, while capital flows back into US dollar assets, further strengthening the US dollar. Elias Haddad, Head of Global Market Strategy at Brown Brothers Harriman, pointed out, "The global macro environment has temporarily been replaced by war-related news. This is a tactical market and you have to respond quickly."