Will Middle East tensions trigger a reversal of the weakening USD trend?

What the desk is arguing

The macro backdrop of rising military tensions in the Middle East could provide support for the USD, reversing its recent downtrend. As the currency approaches its year-to-date lows, traders may seek shelter in the safer haven assets, with the dollar typically benefitting from such shifts during geopolitical unrest.

Furthermore, the timing coincides with the upcoming FOMC meeting, where any indications of tightening monetary policy could boost the USD. Analysts note that historical patterns suggest that increased conflict often results in heightened demand for the dollar, challenging the notion that recent trends of weakness are sustained and may instead offer an opportunity for a reversal.

Where it sits in our coverage

In line with our consensus target of 1.075, analysts believe a turn in USD strength may present opportunities for positioning against this trend. Current expectations reflect a broader currency range between 1.04 and 1.12, indicating that while the dollar may experience upward momentum, volatility around economic data and geopolitical developments remains high.

Recent targets from notable firms include: - JPMorgan, with a Mar-26 target set at 1.10 - Barclays, aiming for a target of 1.08 by the same tenor - BofA, setting a more conservative target of 1.04, reflecting a cautious stance.

How other firms see it

Market sentiment is mixed, as some firms echo the belief that geopolitical factors will support the dollar. Goldman Sachs has expressed a similar view, aligning with MUFG's outlook on dollar strength amid uncertainty.

Conversely, BofA presents a contrary perspective, forecasting further dollar weakness with a target of 1.04 due to anticipated dovish signals from the Fed. Other firms like Citi may also diverge on this narrative, emphasizing economic fundamentals over geopolitical concerns.