The US dollar is on track for its best monthly performance since July as Middle East conflicts disrupt Wall Street's currency outlook.

The US dollar is expected to post its best monthly performance since July, as the conflict in the Middle East disrupts Wall Street’s trading strategy for the world’s major reserve currency.

The Bloomberg Dollar Index rose over 2% in March, driven by a flow of safe-haven funds, and war-induced spikes in oil prices have weakened the market’s expectations for interest rate cuts by the Federal Reserve.

This marks a sharp reversal in the dollar’s trajectory, which had just experienced its fourth consecutive month of declines on the eve of the conflict’s outbreak. With hostilities ongoing, banks and investors that were initially pessimistic about the dollar’s outlook are experiencing intensified pressure.

For instance, JPMorgan’s strategists are optimistic about the dollar for the first time in a year. In the futures market, speculators have shifted to betting on a rise in the dollar, while their short positions were at the highest level in about five years in mid-February.

“The dollar’s short positions for early 2026 were caught off guard by the opponents,” said Steven Englander, head of G-10 foreign exchange research at Standard Chartered Bank.

As traders reduce short bets and energy prices remain high, Englander maintains his forecast for further strengthening of the dollar, which he had made as 2026 approached. He expects the dollar to reach around 1.12 against the euro by the end of the year, which would be the highest level since May. The current exchange rate fluctuates around 1.15.

** Lackluster Start **

Institutions like Goldman Sachs and Deutsche Bank anticipated a decline in the dollar earlier this year, partly based on predictions that the Fed would continue to ease monetary policy into 2026.

The Bloomberg Dollar Index fell about 8% in 2025, marking the largest drop since 2017. The Fed’s three interest rate cuts last year weakened demand for the dollar, and the trade war initiated by President Donald Trump also sparked speculation that capital might flee from US assets. However, the actual outcome was that investors continued to flood in while hedging against the threat of dollar depreciation.

One major risk is that this war may revive discussions about long-term distancing from US markets and the dollar, whether due to concerns over government policies or increased anxiety about the trajectory of national finances spurred by war spending.

The dollar’s dominant position in the global financial system has been unmatched for decades. However, Deutsche Bank wrote this month that the war is testing its status as the world’s oil trade currency and noted a potential shift toward using the yuan in the future.

However, what is more concerning right now is whether market attention will shift toward the risks posed to economic growth by persistently high energy costs. Even though the US, as an oil-producing country, is considered to be affected relatively less, this risk still exists. If this occurs, expectations for the Fed to cut interest rates may heat up again.

Goldman Sachs strategists wrote this week that if concerns shift toward growth, “it could dampen the overall appreciation of the dollar against G-10 currencies.” Morgan Stanley’s expectations go further, stating that with increasing economic worries, the dollar will weaken.

** Expectations Frozen **

Given the uncertain duration of the war and whether tensions will escalate or eventually lead to a peace agreement, many companies are delaying updates to their forecasts.

Jayati Bharadwaj, head of foreign exchange strategy at TD Securities, wrote in a report this week that the dollar should benefit in the current risk-filled environment, and an escalation of the conflict will prompt the company to take a bullish stance.

However, she is somewhat hesitant to revise her pessimistic forecast, as she believes that if the US and Iran reach a peace agreement in the coming weeks, the dollar still has room to weaken.

She wrote, “In this scenario, the uniqueness of US economic growth fades, the safe-haven premium decreases, and recent US measures may lead to increased ‘hedging against the US’ trades, all of which will exert pressure on the dollar.”

Erica Camilleri, senior global macro analyst at Manulife Investment Management, also holds a pessimistic view on the dollar, although the company has closed its short positions on the dollar this month.

She pointed out that there is an “overly pessimistic” view of economic growth outside the US, and while the Fed may lower interest rates, she believes no other central bank will do so this year.

“We still lean towards a depreciation of the dollar in the medium term and expect the euro to appreciate before the end of the year,” Camilleri stated.