Investors trim bets on USD strength as Iran peace hopes and Fed rate-cut prospects weigh on the dollar

Global traders are pulling back from bets on the dollar’s appreciation as hopes for ending the US-Iran war erode the greenback’s appeal as a safe-haven currency. In addition, the dollar faces headwinds as markets still largely price in a potential Federal Reserve rate cut this year. In the early phases of the Gulf conflict, the dollar surged as global financial markets were unsettled. However, it has since fallen about 2.3% from its late-March highs, according to the Dollar Index, which tracks the greenback against a basket of major currencies. In April, the dollar is on track to log the weakest monthly performance since August 2025. By contrast, the euro has nearly regained all of its early-war losses. According to Financial Times, investors and strategists say that hopes for a peace settlement between the US and Iran have eroded the dollar’s early strength — which was partly based on the dollar’s relative immunity to global energy shocks. At the same time, the rebound in risk assets is weighing on emerging-market currencies, hurting the dollar. Meera Chandan, co-head of Global FX Strategy at JPMorgan Chase, commented: "This is a trade based on de-escalation." Thus, JPMorgan again recommends selling USD and buying currencies such as the Australian dollar. "Safe-haven demand for the dollar in the early phase of the conflict has cooled," she said. In trading on April 22, Brent crude rose above $100 a barrel amid uncertainty about peace talks between Washington and Tehran. However, overall market volatility has fallen markedly as investors expect Washington and Tehran to reach a deal to end the war. Mohit Kumar, Europe chief economist at Jefferies, said: "Our base case remains that the two sides will reach an agreement ... though there are frictions." Against this backdrop, traders have shifted away from bets on USD strength. Three-month options in the euro–USD exchange rate, which reflect the relative cost of betting on USD rising or falling, have moved back toward neutrality. Investors are also focusing on divergent policy paths between the US and major Western economies. While higher energy prices are expected to push rates higher in Europe, investors are still pricing in a Fed rate cut this year. This combination has pulled the dollar lower, causing the greenback to weaken against all major currencies except the Japanese yen since early April, according to Bloomberg. The Korean won and the South African rand — currencies hit hardest at the outset of the conflict — have risen more than 2% since the start of the month. Geoffrey Yu, market strategist for Europe, Middle East and Africa at BNY Mellon, said: "The rebound in emerging-market FX is occurring in tandem with the dollar’s decline. This reinforces the view that risk sentiment is improving." Mr. Yu added that traders are returning to higher-yielding currencies, and yield-seeking flows are being encouraged by bets that the Fed could cut rates this year. This expectation is further reinforced by President Donald Trump pressuring the Fed on rates. Mr. Kevin Warsh, nominated by Trump to be Fed chair, argued that AI would boost productivity, potentially paving the way for lower US rates. Fund managers believe that the combination of the possibility of Fed easing and pre-war trends — including diminished confidence due to White House policy volatility and international investors seeking less exposure to US assets — is likely to keep downward pressure on the USD as the conflict subsides. Wall Street banks expect the euro to rise to 1 euro per 1.2 USD in 2027 from the current 1.175 USD, and the pound to rise to 1.38 USD from 1.35 USD. Roger Hallam, international rates head at Vanguard, said: "We think longer-term factors will ultimately pressure the USD lower. But in the near term, the US-Iran conflict will determine the currency’s path."