The U.S. dollar is anticipated to remain within a narrow range in the short term before experiencing a decline later this year, according to FX strategists in a survey. This outlook is based on optimism regarding a swift resolution to the Middle East conflict and the belief that its effects on inflation will be transient. Since the conflict began three months ago, the dollar has followed risk sentiment – appreciating on escalation and depreciating as tensions eased. An initial short-covering rally has resulted in traders being net long, with the dollar appreciating by approximately 2%. However, Brent crude continues to be over 35% elevated, a rise poised to contribute to global inflationary pressures. Early indicators are apparent in the U.S. and euro zone, where inflation has escalated to 3.8% and 3.2%, respectively—significantly exceeding the 2% targets.

Treasury yields have risen significantly, and rate futures have eliminated pre-war anticipations of Federal Reserve rate cuts, now indicating a sustained hold—or potentially an increase—by the end of the year. Several Fed policymakers have adopted a hawkish stance. Poll conducted between May 29 and June 3 indicated an anticipated increase in the euro, projecting a rise of approximately 2% to $1.18 in three months, $1.19 in six months, and $1.20 in one year, remaining consistent with the findings from the May survey. “The driver of dollar weakness is a combination of ‘risk-on’ markets, optimism regarding the resolution of the conflict in the Middle East, and the expectation that, upon resolution, there will be little to no tightening of U.S. monetary policy, as the President is unlikely to favour such measures,” stated Kit Juckes.

“That, along with U.S. policymaking continuing to induce apprehension among global investors regarding the acquisition of U.S. assets, is fundamentally what sustains the current situation,” he added, forecasting that any dollar weakness would be transient. While U.S. President Donald Trump has advocated for lower rates, his selection for Fed chair, Kevin Warsh, may encounter pressure to maintain a stringent policy if the conflict continues and inflation escalates. The European Central Bank is anticipated to implement two rate increases this year, according to a separate poll. While forecasters have long anticipated a depreciation of the dollar, that certainty has fluctuated in recent months, with a significant minority now forecasting a more modest decline – or even potential appreciation. Analysts indicated that uncertainty is obscuring medium-term forecasts.

“The risks are considerably heightened, suggesting at least a neutral bias, if not a hawkish stance from the Fed. There is considerable uncertainty regarding the war, and expectations suggest that a potential deal could be imminent, which may relieve some of the pressure on oil markets,” stated Alex Cohen. However, with each passing day, the risks associated with escalating oil prices and rising global inflation intensify, he noted, predicting a degree of dollar strength in the near term. Enquired about dollar positioning by the conclusion of June, slightly more than half of the strategists – 21 out of 40 – anticipated minimal variation. Only two observed a transition back to net shorts, whereas eight indicated that net long positions would rise.