Dollar Posts Best Monthly Performance Since July, Disrupting Global Currency Markets

Dollar Sees Best Month Since July as Middle East Conflict Boosts Haven Flows

The Bloomberg Dollar Spot Index is up more than 2% in March, marking a sharp reversal for the US dollar. The index's gain is driven by haven flows and diminished expectations for Federal Reserve interest-rate cuts following the escalation of the conflict in the Middle East, which has caused energy prices to soar.

The war has put pressure on banks and investors who had previously been bearish on the dollar. JPMorgan Chase & Co. strategists have turned bullish on the dollar for the first time in a year, while speculators in the futures market have flipped to betting on dollar gains. Standard Chartered Bank's Steven Englander sees the dollar reaching $1.12 per euro by year-end, its strongest since May, from around $1.15 now.

Firms such as Goldman Sachs Group Inc. and Deutsche Bank AG had previously forecast losses for the US currency, based on the expectation that the Fed would continue to ease monetary policy in 2026. However, the war has changed the market's outlook, and many firms are now revising their forecasts to reflect a stronger dollar.

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Overarching risks to the dollar's rally include the potential for a prolonged stretch of high energy costs, which could lead to economic growth concerns and a reemergence of expectations for Fed rate cuts. A shift toward growth worries could temper broad dollar appreciation against G-10 currencies, according to Goldman Sachs strategists.

Forecasts for the dollar are being revised, with some firms, such as TD Securities, adopting a bullish bias due to the current risky environment. However, others, such as Manulife Investment Management, remain bearish on the dollar, citing the potential for the Fed to lower rates and a reduced safe-haven premium.

For now, the bulls are in the driver's seat, and the dollar and oil have climbed, while stocks have tumbled on doubts over a ceasefire. Bets on dollar gains dominate the outlook for the next month in the options market, even though positioning for the one-year period shows expectations for the strength to fade.