The ’s resilience since the war began is not a mystery, but it is being misread. The has appreciated roughly 1.8% this month alone, following a modest 0.65% gain in February after January’s 1.35% slide. Against every G10 currency, the greenback has advanced since hostilities commenced. All but the and have surrendered more than 1.5%. The move looks like strength. It is, in part. But it is also a story about positioning, leverage, and the jump in US rates.
Unpacking Safe Haven
Two channels are driving the dollar’s gains. The first is mechanical: short covering. For months, traders had used the dollar as a funding currency; borrowing cheap in greenbacks to reach for yield in Latin American bonds, for example, and other higher-beta assets. When those risk positions went south, and they invariably do, they were sold, and the funding currency was bought back, which gives the appearance of safe-haven demand.
Another layer of the same dynamic came from foreign equity investors who had been financing the US current account deficit, and many of them with dollar hedges layered on top. As US stocks tumbled, the shares were liquidated and the short-dollar hedges were lifted, or, for some, the drop in equity values left them simply over-hedged, and they trimmed accordingly. Either way, the bid for dollars was structural, not discretionary.
The second channel is more recognizable as genuine safe-haven demand. War compresses risk appetite, and with the United States now the world’s largest energy producer, some investors judge the American economy as comparatively insulated from the oil shock radiating out of the Gulf. That is a reasonable, if incomplete, argument. It is also the kind of narrative that tends to have a shorter shelf life than the positioning adjustment does.
US Rates more than Differentials in the First Instance
What is less appreciated is how sharply the rates landscape has shifted, and how that is influencing the dollar in ways that go beyond the usual interest rate differential logic. Since the war began at the end of last month, the has risen roughly 53 basis points. The ten-year yield is up about 45 bp. While theory says interest rate differentials are important, in the short run the jump in US rates seems to offer a better explanation of the dollar’s strength. Perhaps when rates spike on supply shocks and inflation fears rather than growth optimism, it changes the dynamics.
And then there is the . Before the war, fed funds futures had fully priced two cuts this year and assigned roughly 40% odds to a third. By the time, the FOMC met last week, some of that easing had been walked back, but the market still expected at least one cut. The statement moved the needle little. It was Chair Powell’s framing in the press conference that did the heavy lifting. He played down the seemingly incongruous projections which showed the median view having increased the forecast and growth forecasts while keeping the steady and repeating the one rate this year that was seen in December 2025.
Powell was also unusually candid about the Fed’s limitations. He acknowledged that missing the inflation target is more the norm than the exception in recent years and that the war poses genuine challenges for both mandates simultaneously.
Higher Prices Bite
Meanwhile, at the gas pump, the political economy is shifting in real time. Retail gasoline prices have risen every single day since the war began — weekends included — adding roughly a dollar per gallon to bring the national average close to $4.00. Grocery prices appear to be following. This is the kind of inflation that is felt viscerally, that does not require an economics degree to understand, and that generates political pressure with a speed that quarterly GDP estimate does not.
Against this backdrop, the Fed’s framing of the labor market deserves scrutiny. Powell’s characterization of “recent stability” downplayed the loss of 92,000 jobs in February. He acknowledged, correctly, that the administration’s immigration policies have weighed on labor force growth. That is the third policy (joining the tariffs and war) that are deterring this Fed and the next chair from being able to deliver the lower rates that the president has incessantly and angrily demands.
Powell made it clear that he intends to serve as Chair until his successor is confirmed by the Senate, which will not go forward until the investigation is over. He also indicated he would not relinquish his governor seat (term runs into 2028) while investigation is ongoing in any fashion. This is neither unprecedented nor common. He sees it as a defense of institutional independence. Markets should take him at his word.
DXY
Technically, the Dollar Index peaked for the year on March 13 near 100.50. Since then, it has found support just below 99.00, hovering above the 20-day moving average which now sits a fraction above that level. The index has spent little time above 100 since mid-last year, and the daily momentum indicators are rolling over from overbought territory. That argues for some consolidation. But speculative positioning, though it has shifted dramatically — net long euro positions collapsed from around 150,000 contracts to barely 20,000, and the market has swung to nearly 70,000 contracts net short yen — does not yet look extreme enough to make a compelling case that the adjustment is finished, especially with the fear the war escalates wafting in the air.
The war premium in the dollar is real. So is the rate support. But both are contingent on an escalation path that remains deeply uncertain. The five-day pause announced this week is being viewed skeptically, and rightly so. There still seems to be a risk that the war escalates. The US is moving more troops to the area, and this is spurring speculation that the US could take Kharg Island, a critical export facility for Iranian oil.
Until there is more clarity, the greenback will retain a bid. When clarity comes, the unwind could be swift. We have seen a couple of such responses.
