At the time of writing, the euro-dollar exchange rate remains flat year to date. However, this simple statement fails to capture the sharp fluctuations the currency has experienced since January. By the end of February, the dollar had depreciated by 2.5% against the euro, reaching a low of 1.20, as investors shifted their allocations towards non-US equities. Global equity inflows in February totalled $101 billion—the highest level since November 2024—with most of the capital flowing into Europe, Japan and emerging markets. This trend suggested a potential regime shift with investors seeking to diversify away from the heavy concentration of exposure to US assets. Additionally, markets were anticipating at least two Federal Reserve rate cuts by year-end, supported by weaker employment data and subdued inflation.
The outbreak of war with Iran, however, prompted investors to seek safety in the US dollar. As energy prices surged and inflation fears intensified, market expectations shifted dramatically, with all anticipated rate cuts for 2026 being priced out. The dollar subsequently climbed to a high of 1.1420. That said, the dollar’s strength has been relatively modest compared to previous episodes. Historically, oil shocks have benefited Gulf states, which tend to reinvest their windfall profits into US Treasury bonds. In the current context, however, the closure of the Strait of Hormuz by Iran and subsequent attacks on oil infrastructure have forced oil producers not only to cut back on production but also to sell US Treasuries to raise funds—both to defend their pressured domestic currencies and to finance wartime expenditures.
More recently, the dollar has weakened following news of a ceasefire agreement between the US and Iran. Although the situation remains uncertain, markets are cautiously optimistic that the worst has passed and are once again pricing in interest rate cuts for this year. Looking ahead, if oil prices remain near current levels, renewed pressure on the euro is likely. However, if all parties succeed in reaching a lasting agreement, we believe the dollar could reach new lows as investors resume diversifying their portfolios.
Date of report: April 20th 2026