Short Positions, Surging Oil, and a Quick Rally
Traders have been positioned short the dollar since December, betting on a decline against a basket of currencies. The currency has fallen roughly 12% since the start of 2025. The recent spike—about 1.5% since Monday—was largely driven by short-covering amid surging oil prices, rather than a classic “flight to safety.”
Interest rate futures also played a role, with markets no longer pricing in a June Fed rate cut, providing some near-term support for the dollar. However, contracts still anticipate approximately two cuts by year-end, reinforcing the broader expectation of a weaker greenback.
Strategists Remain Cautious
The Reuters monthly survey of 60 analysts, conducted largely after the first missile strikes, showed that most strategists maintain a cautious outlook. Median forecasts suggest the euro could rise about 2% to $1.18 by the end of March, potentially reaching $1.19 in three months and $1.20 in six months, largely unchanged from prior expectations.
Jane Foley, head of FX strategy at Rabobank, noted: “We haven’t changed our stance. We’re still continuing to expect euro-dollar and various dollar crosses to trade choppily this year. But is the dollar as safe as it used to be? Probably not.”
JP Morgan strategists added that the dollar rally this week was influenced by short-covering, with deleveraging already appearing in flows data prior to the outbreak of hostilities. They estimated that full coverage of dollar shorts could support a 1.5–2% increase in the currency, depending on the conflict’s trajectory.
Emerging Markets and Oil Prices
While global stock markets have sold off, traditional safe-haven assets such as U.S. Treasuries have underperformed, and gold—despite a roughly 20% gain this year—has slightly retreated. Meanwhile, Brent crude has surged nearly 15% since last Friday and is up about 37% in 2026 on fears of supply disruptions.
Emerging market currencies, particularly in Asia, have suffered from the combined pressures of higher oil prices and rising bond yields. Alejandro Cuadrado, global head of FX and Latam strategy at BBVA, commented: “EM and Latam currencies are suffering from risk-off exacerbation with the double whammy of higher oil and the new jump in real yields. For now, more defensiveness is likely before any attempt of dip-buying.”
Heightened Uncertainty Persists
Market participants remain wary amid uncertainty over U.S. tariff policies and potential shifts in central bank leadership, including the nomination of Kevin Warsh as the next Fed Chair. The wide divergence in year-ahead forecasts highlights this uncertainty: while the median prediction sees the euro at $1.21, individual estimates vary by as much as 18 cents, the widest range in Reuters polls since October.
Dan Tobon, head of G10 FX at Citi, summed up the cautious sentiment: “One person on my team is dollar-bullish, one is dollar-bearish, and the other decides not to even look at the dollar. This uncertainty—particularly around the U.S. economy and labor market—is keeping euro-dollar effectively pegged in a range for now.”