Foreign exchange strategists polled between May 1 and May 6 say the trajectory of the U.S. dollar will be set mainly by developments in the U.S.-Israel war with Iran in the near term, with a broader view that the currency will remain range-bound before easing later in the year.
Since the conflict began on February 28, the dollar has tended to move in step with news of escalation and de-escalation - rising on headlines that signal intensification and retreating when tensions abate. In the opening month of the war the dollar gained about 3% on a combination of short-covering and a partial safe-haven bid, but it has given up most of those earlier gains as market sentiment shifted.
Energy markets have been a central factor in that dynamic. The International Energy Agency called the situation the worst-ever energy crisis, with Brent crude trading nearly 40% above pre-war levels. Those elevated oil prices have kept inflation risks on the table and provided some underpinning for the dollar.
Monetary policy developments have added to the mix. At its meeting last week the Federal Reserve held rates as expected, and a divided committee signaled a prolonged pause. Rate futures have moved from pricing in multiple cuts to expecting a hold and even attaching a slim chance of a hike by the end of the year. That pivot in expectations has tempered some of the dollar's downside momentum but has not undone the broader pattern of range-bound trading.
Despite the market-moving backdrop, strategists surveyed showed reluctance to substantially alter their forecasts. Median projections in the May poll were little changed from those submitted in February, prior to the outbreak of hostilities, suggesting many forecasters are inclined to wait out the conflict rather than assume it will produce permanent shifts in currency valuations.
Near-term FX forecasts
The euro was projected to sit near its current level around $1.18 in three months and to appreciate slightly to $1.19 in six months - forecasts that were a touch firmer than in an April survey. Paul Mackel, global head of FX research at HSBC, described the immediate outlook succinctly: "It’s likely the dollar is stuck in this relatively range-bound period for the next few months. On the one hand, you get moments of de-escalation and the dollar softening. On the other hand, you get reminders about how it’s still a challenging backdrop and that’s giving the dollar an upper hand."
Mackel added that investor sentiment tied to the war is the primary driver of dollar moves, and he expects that influence to remain dominant in the coming months.
Positioning and longer-term views
Market positioning swung sharply with the conflict. Traders moved from being deeply net-short the dollar heading into the war to comfortably net-long more recently. When respondents were asked how positioning might evolve by the end of May, half - 22 of 44 - said they expected little change. Only two forecast a reversal back to net-shorts, while 12 expected net-longs to rise further.
Nonetheless, the poll preserved a longer-term consensus that the dollar will soften. The year-ahead euro median of $1.20 was unchanged from April, reflecting continued expectations for a lower dollar over a longer horizon. Ales Koutny, head of international rates at Vanguard, said that over time investors are seeking diversification and that European currencies - especially the euro and sterling - stand to benefit from that search.
Koutny also noted oil price implications for large energy importers, saying he expected oil to remain elevated as markets price in disruption to flows through the Strait of Hormuz. That expectation leaves big importers exposed to extended shortages and supports a narrative in which the dollar weakens against European currencies yet retains relative strength versus some major growing importers, notably in Southeast Asia.
Yen intervention and its limits
Currency strategists were skeptical that recent intervention would have more than a temporary effect on the yen's exchange rate against the dollar. Reports suggested Japan may have spent as much as 5.48 trillion yen, or around $35 billion, last week to support the currency after it slipped past 160 per dollar. Median forecasts for the yen remained broadly unchanged from the prior month, showing 156 per dollar in three months and 154 per dollar in six months.
Koutny commented on the challenges for yen support, saying the market would like to be long yen and to buy into a yen-strengthening story. But he warned that unless the Bank of Japan signals a serious move toward higher rates, this type of intervention could need to be repeated frequently just to hold a floor under the yen. "The longer they take to do it, the more pressure there is on the yen, and the more likely we remain at or around 160 per dollar, if not higher," he said.
The May 1-6 survey highlights how geopolitical conflict, oil market disruption and central bank policy uncertainty are interacting to keep the dollar trading in a relatively narrow band for now, even as many strategists retain a longer-term view of gradual dollar depreciation versus key European currencies.