Foreign exchange strategists surveyed between May 29 and June 3 anticipate the U.S. dollar will trade in a narrow band in the immediate term before losing ground later this year, buoyed by hopes the Middle East conflict will resolve quickly and that any resulting upward pressure on prices will be short-lived.
Since hostilities began approximately three months ago, the dollar has largely moved with shifts in risk appetite - appreciating when the conflict escalated and slipping when tensions eased. An initial wave of short-covering pushed the dollar higher by about 2%, leaving many traders net long. At the same time, Brent crude oil has climbed more than 35% from pre-conflict levels, a jump that is expected to feed through to consumer prices globally.
Early signs of that oil-driven inflationary impulse are visible: consumer price inflation has risen to 3.8% in the United States and 3.2% in the euro zone, both well above the 2% objectives set by central banks. Treasury yields have moved sharply higher as markets adjust to the stronger inflation readings, and rate futures no longer reflect pre-war expectations of Federal Reserve rate cuts. Instead, futures currently point to a prolonged hold on rates - and, by year-end, the possibility of a rate increase. Several Federal Reserve policymakers have also adopted a more hawkish public tone.
Despite the near-term dollar strength, median forecasts from the poll show the euro appreciating over the coming months: about 2% higher at $1.18 in three months, $1.19 in six months and $1.20 in a year - projections that were unchanged from the prior month’s survey. That path assumes the current geopolitical tensions will ease and that any U.S. monetary easing will be limited.
Kit Juckes, chief FX strategist at Societe Generale, said the forces likely to weaken the dollar include a broad 'risk-on' market backdrop, expectations that the conflict will conclude without long-lasting inflation effects, and political pressure against aggressive U.S. tightening. He warned, however, that any dollar softness could be temporary.
Domestic politics could complicate the outlook. While President Donald Trump has publicly called for lower interest rates, his nominee for Federal Reserve chair, Kevin Warsh, may encounter pressure to keep policy tight if the conflict persists and inflation continues to rise. In parallel, a separate poll indicates the European Central Bank is expected to raise rates twice this year, a development that would narrow the monetary policy differential supporting the dollar.
Forecasters who have long tilted toward a weaker dollar have seen that conviction waver in recent months. A significant subset of analysts now anticipate only a modest decline in the currency - and some even predict appreciation - reflecting heightened uncertainty across the medium term.
Alex Cohen, an FX strategist at Bank of America, described the evolving balance of risks: a potential imminent diplomatic deal could ease oil-market pressures and lessen upward inflation risks, but continued conflict would raise the odds of still-higher oil prices and greater global inflation. He added that these dynamics argue for some near-term dollar strength.
On the matter of positioning, strategists were split about changes by the end of June: just over half - 21 of 40 respondents - expected little change in dollar positioning. Only two predicted a move back to net short positions, while eight expected net long positions to grow.
What this means for markets
- Currency markets are likely to remain sensitive to geopolitical developments and oil price moves in the near term.
- Higher oil-driven inflation and elevated yields could keep monetary policy tighter for longer, affecting bond markets and interest-rate-sensitive sectors.
- Expectations of ECB tightening and any eventual easing of Middle East tensions are central to the projected gradual weakening of the dollar over the coming year.