Greenback Gives Back Its War Premium
Fresh optimism over a possible end to the Iran war has pushed the US dollar back toward pre-conflict lows. The move suggests that part of the dollar’s recent strength was tied to the energy shock and the perception that the United States was better positioned than Europe and Asia to absorb higher oil prices.
When the conflict began, the dollar was one of the few major global prices to rise alongside oil. The gains were not dramatic, with the DXY index rising as much as 3% during the first month of the war, but they reflected a relative performance trade as investors favored oil-rich America over more energy-exposed economies.
Energy Exposure Drove The Initial Move
The dollar benefited partly from its role as a liquid safe asset, especially as Gulf states and other investors sought defensive holdings. However, the larger driver was the belief that Europe and Asia would suffer more from higher energy import bills than the United States.
That advantage has faded as markets price in hesitant de-escalation and a fragile ceasefire. The stronger dollar also faced resistance from countries worried that currency weakness would worsen their energy costs, with Japan intervening last week by selling dollars.
Oil Normalization Could Shift Rate Bets
The first major question for markets is whether a fall in oil prices would revive speculation about Federal Reserve rate cuts while reducing the tightening bias that appeared in Europe and Asia during the energy shock.
The war and oil spike removed roughly two expected Fed cuts from market pricing this year and added rate pressure in the euro zone and the UK. If the conflict ends and energy prices ease, that shift could reverse, potentially supporting the euro and other currencies exposed to lower fuel costs.
Central Banks Still Face A Timing Problem
Even if the war ends, energy experts warn that fuel markets may take months to normalize. That means inflation rates and inflation expectations may not fall quickly enough for central banks to return immediately to their pre-war assumptions.
In the United States, the arrival of Donald Trump’s appointee Kevin Warsh as Fed chair could bring rate cut expectations back into focus. However, strong US equities, a resilient economy and stable labor market indicators may make early easing difficult, especially if regional Fed officials resist a faster shift.
China And The Yuan Add Another Variable
The second issue is the planned Beijing summit between Trump and Chinese President Xi Jinping, which was postponed because of the war. If talks resume, markets may watch whether Washington pushes for a stronger yuan as part of a broader effort to reduce trade tensions.
As the latest Iran peace proposal emerged, the dollar touched its weakest level against the offshore renminbi in more than three years. The dollar is down more than 2% against the yuan this year, compared with a much smaller decline for the broader DXY index.
AI Keeps A Floor Under The Dollar
The third factor is the strength of Wall Street. Dollar bears may underestimate how much US equity momentum, upgraded profit forecasts and heavy artificial intelligence investment can support capital inflows into the United States.
Profit growth forecasts for S&P 500 companies in 2026 have risen to as high as 23%, compared with about 15% when the war began. Euro zone profit forecasts have improved too, but by a smaller margin. That leaves US earnings growth expectations well ahead of Europe. For investors, the result is a more complicated dollar outlook: a peace deal could remove the war premium, but strong AI-led capital flows may limit the downside.
