Key facts
- US dollar expected to trade range-bound in the near term.
- Dollar anticipated to weaken later in the year.
- Optimism over Middle East conflict resolution is a factor.
- Middle East conflict's inflationary impact is considered temporary.
- Analysts express uncertainty regarding medium-term dollar forecasts.
- Geopolitical risks are a key driver of uncertainty.
A Reuters survey of foreign exchange strategists indicates that the U.S. dollar is expected to remain range-bound in the near term before weakening later in the year. This outlook is influenced by optimism that the Middle East conflict will conclude soon and that its inflationary impact will be temporary. The dollar's movement has tracked risk sentiment since the conflict began, rising on escalation and slipping as tensions eased. Brent crude prices are more than 35% higher than before the conflict, contributing to inflation rates of 3.8% in the U.S. and 3.2% in the euro zone, both above 2% targets. Treasury yields have climbed, and rate futures have priced out pre-war expectations of Federal Reserve rate cuts, now suggesting a prolonged hold or even a hike by year-end, with several Fed policymakers adopting a hawkish tone. Median forecasts from the poll suggest the euro will rise to $1.18 in three months, $1.19 in six, and $1.20 in a year, unchanged from the previous month's survey. Analysts cited 'risk-on' markets, optimism about conflict resolution, and a potential lack of U.S. monetary policy tightening as drivers of dollar weakness. However, uncertainty surrounding the war's duration and its potential for higher oil prices and global inflation clouds medium-term forecasts, with some strategists predicting near-term dollar strength. Positioning data indicates that a majority of strategists expect little change in dollar positions by the end of June.