The US dollar is on track for its strongest monthly rally since July last year, as safe-haven demand triggered by the Middle East conflict and surging energy prices have completely disrupted Wall Street's forecasts for the global reserve currency.
The Bloomberg Dollar Spot Index has climbed more than 2% in March. Following the outbreak of the conflict, soaring energy prices combined with cooling interest rate cut expectations have jointly pushed the dollar higher. This sharp reversal stands in stark contrast to the dollar's four consecutive months of decline just prior to the conflict.
This rebound has caught institutions previously bearish on the dollar off guard. JPMorgan strategists turned bullish for the first time in a year, and speculators in the futures market quickly shifted from the largest short positions in nearly five years in mid-February to betting on a dollar rally. Steven Englander, head of G10 FX research at Standard Chartered, said, &#34;Dollar short positions heading into early 2026 were caught off guard.&#34;
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<h2>Short Positions Routed, Bulls Take the Initiative</h2>
Entering 2026, institutions such as Goldman Sachs and Deutsche Bank generally predicted the dollar would weaken, based on the core logic that the Federal Reserve would continue its interest rate cut cycle. This assessment is supported by historical data—the Bloomberg Dollar Index fell approximately 8% cumulatively in 2025, the largest annual decline since 2017, as three interest rate cuts last year eroded dollar demand.
However, the geopolitical conflict has shifted this narrative. Steven Englander maintains his bullish view from the beginning of the year, forecasting the dollar to rise to approximately 1.12 against the euro by year-end—stronger than the current level of around 1.15—marking a new high since May. In the options market, positions betting on a stronger dollar over the next 12 months dominated the London trading session on Friday.
Bloomberg macro strategist Brendan Fagan noted that shortages in energy spot markets will provide sustained buying interest to the dollar, as immediate demand for physical crude oil translates directly into immediate demand for the dollar, while capital inflows will further strengthen dollar assets.
<h2>Investors Wait and See, Forecast Divergence Intensifies</h2>
Despite the dollar's short-term strength, many institutions remain cautious about revising their forecasts, primarily because the duration of the conflict and its future trajectory remain unclear.
Jayati Bharadwaj, head of FX strategy at TD Securities, wrote in a report this week that the current risk environment favors the dollar, and the bank would turn bullish if the conflict escalates further. However, she also noted that if a peace agreement is reached between the US and Iran in the coming weeks, the dollar could weaken, so she is not yet revising her bearish forecast. She wrote, &#34;In this scenario, the fading of the US economic growth advantage, the contraction of the safe-haven premium, and the potential intensification of 'Hedge US' trades triggered by recent US policies would all put pressure on the dollar.&#34;
Erica Camilleri, senior global macro analyst at Manulife Investment Management, also maintains a medium-term bearish stance, even though the firm closed its dollar short positions this month. She cited the 'overblown' pessimistic sentiment regarding growth outside the US and the fact that the Fed still has room for interest rate cuts as reasons, stating, &#34;We maintain a bias toward medium-term dollar depreciation and still expect the euro to appreciate by year-end.&#34;
<h2>Long-Term Risk: Dollar Hegemony Under Scrutiny</h2>
Beyond short-term positioning, the war is also reactivating a deeper debate—whether the dollar's long-term dominance faces a challenge.
Deutsche Bank noted in an article this month that the war is testing the dollar's status as the settlement currency for global oil trade, mentioning a potential trend of the Renminbi's rising usage share. A broader concern is that the war could trigger anxiety over the US fiscal trajectory, potentially driving a gradual withdrawal of capital from US markets and dollar assets.
However, Goldman Sachs strategists noted this week that once market attention shifts to the risks of high energy costs weighing on economic growth, it &#34;could dampen the overall appreciation of the dollar against G10 currencies.&#34; Morgan Stanley went further, suggesting the dollar will weaken as economic concerns mount.
Elias Haddad, head of global market strategy at Brown Brothers Harriman, said, &#34;Relative macro fundamentals have taken a backseat, with war-related headlines dominating market direction.&#34; He expects the dollar's downward trend to eventually resume, emphasizing, &#34;This is a tactical market, and one must react quickly.&#34;

USDU

Since March, the Bloomberg Dollar Spot Index has climbed more than 2% cumulatively, on track for its largest monthly percentage gain since July last year. Soaring energy prices and cooling expectations for Fed Rate Cuts are both pushing the dollar higher

- The US dollar is poised to record its strongest monthly gain since July 2025, driven by safe-haven demand amid Middle Eastern conflicts and rising energy prices.  
- The Bloomberg Dollar Spot Index increased by over 2% in March, reversing a four-month decline, catching previously bearish institutions off guard.  
- Many analysts remain cautious about the dollar's trajectory, citing uncertainties around the conflict's duration while highlighting concerns over its long-term dominance as a global trade currency.

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