US dollar set to fall? Energy shocks and policy risks raise doubts

The US dollar may be poised for a decline as elevated energy prices, domestic policy risks and a rising risk premium chip away at its safe-haven appeal, according to a Reuters poll published on Tuesday.

Nearly 70 foreign-exchange strategists surveyed by Reuters between 27 March and 1 April expect the euro to hold steady at $1.16 through end-April and end-June, before climbing roughly 2% to $1.18 in six months and a further 2% to $1.20 in a year.

Safe-haven bid loses momentum

The dollar's roughly 2% gain against a basket of six major currencies since the conflict began has been driven largely by short-covering rather than fresh conviction, analysts said.

"The safe-haven bid has been declining," said Manuel Oliverio, a currency strategist at BBVA in Madrid.

"US Treasury yields have moved up, and gold has fallen by more than 10% since the start of the conflict."

Steven Englander, global head of G10 FX research at Standard Chartered in New York, said the recent dollar buying lacked conviction.

"When hopes for a resolution emerge, you see the dollar sell off very quickly," he said.

Surprise policy moves "almost always" raise the risk premium on US assets by introducing uncertainty about potential reversals.

Policy risks compound the pressure

Turmoil around tariff policy and concerns over Federal Reserve independence have further undermined the dollar's status as a reliable store of value, analysts said.

A high inflation risk premium has extinguished expectations for US rate cuts this year and weighed broadly on risk assets, as markets remain acutely sensitive to shifting signals from President Donald Trump on the conflict's trajectory.

MUFG's head of global markets research for EMEA, Derek Halpenny, noted that oil sitting 40% above pre-war levels, after pulling back from an early-March high of $119.50, would typically translate into a 4%-5% move for the dollar.

"The move in USD has been far more modest," he said, adding that the currency's endorsement as a perpetual safe haven "has been undermined to a degree."

Wells Fargo turns bearish

Erik Nelson, head of G10 FX strategy at Wells Fargo, said "bearish dollar" best captures his outlook, arguing the greenback is "trading rich versus fair value."

Dollar long positions had become "pretty stretched" as markets bet heavily on a decline, and Wells Fargo is now advising clients to adopt a bearish stance over coming quarters.

Nelson warned that higher energy costs would send "massive ripple effects" through the economy, squeezing real incomes that are already under pressure.

"The labour market backdrop is poor and wage growth has been anaemic," he said.

Worst-case scenarios for markets

Analysts identified two outcomes that could send oil prices sharply higher and trigger a sell-off in risk assets: stronger-than-expected sanctions on Iran, and a US military strike on Iranian targets.

"The worst-case scenario for risk assets would be some form of US attack on Iranian military targets, which would make oil prices jump and risk assets plunge," said Marc Robinson, FX analyst at HSBC in London.

A scenario in which Trump orders a strike but calls it off at the last minute could provide short-term relief, Robinson added, but would amplify volatility over the longer term as markets become more sensitive to sudden shifts in policy.