Dollar's Iran war rebound set to unwind as safe-haven status weakens

The U.S. dollar's modest recovery since the U.S.-Israeli war against Iran erupted over a month ago stands poised to reverse as its broad safe-haven allure diminishes, according to nearly 70 currency strategists surveyed by Reuters. The greenback gained roughly 2% against major peers—driven by short-covering against heavy net-short positioning—but traditional havens like Treasuries and gold faltered amid yield surges and 10% precious metal declines.

Medians project the euro-dollar pair steady at $1.16 through April and June, then rising 2% to $1.18 in six months and another 2% to $1.20 annually. Standard Chartered's head of G10 FX, Steve Englander, described dollar buying as "not fervent," noting rapid selloffs on de-escalation glimmers like oil dipping below $90. He pegged the currency's safe-haven shine as compromised by policy unpredictability.

Wells Fargo's Erik Nelson highlighted dollar premium to fair value alongside overstretched long positions. U.S. insulation from energy imports proves overstated, with consumer real income squeezed by gasoline at $4 per gallon and softening labor data. Risk premia from inflation—erasing Fed cut bets—broadly punished equities while tariff threats alienated foreign investors.

March marked the dollar's strongest monthly gain since July 2025 at 2.9%, but de-escalation hopes sparked reversals. President Trump's off-ramp signals—oscillating between escalation and wind-down—amplified volatility across assets. Yen intervention threats and sterling slides underscored fragmented haven flows favoring Canada and Norway as oil exporters.

FX strategists anticipate normalization as risk appetite rebounds and global conditions ease. Morningstar flagged pre-war 10% dollar overvaluation, projecting fiscal deficits, Fed autonomy queries and foreign policy unease resuming dominance. Energy importers like China and the eurozone face outsized hits, buoying commodity currencies temporarily.

Markets await Friday's jobs report for war-gripped economic clues. Persistent uncertainty elevates U.S. assets' risk premium, capping rebound durability absent fresh shocks.