What’s next for the USD after the ceasefire in the Middle East?
The desk anticipates continued weakness for the USD following the recent ceasefire agreement between the US and Iran, as highlighted by MUFG EMEA's analysis. This development has already led to a significant reversal in the dollar's strength, with the dollar index dropping from a 3% gain to just over 1% since the conflict's escalation. The desk notes that the easing of military tensions has diminished safe-haven demand for the dollar, while diverging monetary policy signals from the Fed and other central banks further exacerbate this trend. Per the full note source, the Fed's reluctance to raise rates in the face of rising inflation contrasts sharply with the ECB's more hawkish stance, which is expected to lead to further dollar depreciation.
What the desk is arguing
The desk posits that the USD may continue to weaken as de-escalation of military tensions in the Middle East is perceived positively by risk-sensitive assets. This could manifest as a desire for higher-yielding currencies, driven by increased investor confidence in global economic recovery. As optimism spreads through markets, the dollar's safe-haven status may wane, further contributing to its decline against other currencies.
Supporting this thesis, recent market movements suggest that currencies linked to growth, such as the euro and Australian dollar, have seen early gains in the wake of the ceasefire. Such developments reiterate the notion that diminished geopolitical risks propel investors away from the USD, which tends to strengthen during periods of crisis. The possibility of geopolitical stability in the region suggests that the outlook for the dollar could turn negative if this trend persists.
Where it sits in our coverage
Our current consensus target for the USD is 1.075, with a firm spread ranging from 1.04 to 1.12. This view aligns with recent discussions about a weakening dollar impacted by geopolitical events in the Middle East. The evolving narrative around USD behavior amidst global tensions will be crucial as we gauge market responses to the ceasefire.
Prominent firms have also issued forecasts that reflect varying perspectives on the dollar's trajectory:
- JPMorgan: Targeting 1.10 by Mar26
- Barclays: Anticipating a target of 1.08 by Mar26
- Goldman Sachs: Projecting a target of 1.12 by Mar26
How other firms see it
Other firms show mixed sentiments. Those aligned with the desk's view anticipate a further decline in the dollar's value, bolstering the thesis that a favorable geopolitical environment could impact the currency negatively.
- Goldman Sachs: Aligned stance, targeting 1.12 by Mar26
- Morgan Stanley: Aligned stance, predicting a target of 1.09 by Mar26
Conversely, firms like BofA are taking a contrary position, still maintaining a cautious outlook for the dollar, with a target set lower at 1.04 by Mar26. This divergence highlights the uncertainty lingering in the market amidst geopolitical shifts.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The USD is expected to weaken as geopolitical tensions in the Middle East de-escalate following the ceasefire.
- 02Investor appetite for risk may shift away from the USD, benefiting growth-oriented currencies.
- 03Market sentiment could pivot significantly if the ceasefire holds, affecting the dollar's traditional safe-haven status.
Market implications
Should the ceasefire lead to a more stable geopolitical environment, it could result in a sustained decline for the USD. This opens opportunities for currencies perceived as riskier, likely shifting capital flows and altering the landscape for FX trading in the near term.
Risks to this view
Persistent uncertainties surrounding the durability of the ceasefire or new developments in the geopolitical landscape could reverse the current trends. Additionally, stronger-than-expected economic data from the US could challenge the prevailing bearish sentiment on the USD.
Welcome to the MUFG Global Markets FX Week Ahead podcast with Lee Hardman, Senior Currency Analyst at MUFG. It's Friday, 10th April 2026, and joining Lee to pose some questions on the financial market themes for the week ahead is Seiko Kataoka-Fisher, Director from Japanese Customer Sales for EMEA in London. This material is only intended for professional investors in jurisdictions in which its use is permitted under applicable laws, rules and regulations.
It has been produced for information purposes only and should not be construed as investment research or advice. MUFG EMEA disclaimers and disclosures can be located on our website. Hi Lee.
Hi Seiko. We've seen the U.S. dollar quite sharply lower this week after the U.S. and Iran agreed to a two-week ceasefire. Do you expect the U.S. dollar to weaken further?
Yeah, I think that's certainly the main development. This week has been the ceasefire agreement that has triggered, like you say, a sharp reversal in terms of FX market performance. The dollar we've seen has given back most of the gains recorded over the past month since the Middle East conflict started.
At the worst point of the conflict, the dollar index had strengthened by just over 3%, but now it's up by just over 1%. So it's been already quite a big reversal lower for the dollar. The main beneficiaries from the ceasefire over the past week have been the more high beta G10 commodity currencies of the Norwegian krona, New Zealand dollar, and Australian dollar, alongside the other scanty currency of the Swedish krona.
All four of those currencies had underperformed since the Middle East conflict began, especially the New Zealand dollar and Swedish krona. So it's no surprise that those are the ones which are bouncing back the most over the past week. Certainly these de-escalating tensions in the Middle East have helped to ease some of the safe haven demand for the dollar, and that leaves it vulnerable to the negative impact from the recent unfavorable move that we've seen in yield spreads, and also potentially as well a further loss of confidence triggered by the heightened US policy uncertainty that we're seeing under President Trump.
Looking as well at the Fed's recent policy signals, I think it's fair to say that they are willing at least to look through the energy price shock initially and to leave rates on hold for longer. While if we look at messaging from the ECB, Bank of England here in Europe, more recently they've been indicating that they're more willing to raise rates in response to these upside inflation risks. So we still expect the ECB to deliver 50 basis points of hikes in the coming quarters as they look to try and dampen the upside inflation risks.
And that does then create the potential for policy divergence there between the Fed and European central banks, and that could encourage further dollar weakness. Obviously we are making the assumption as well that the Middle East conflict will continue to de-escalate and the energy supply through the Strait of Hormuz will gradually resume. Although obviously we do acknowledge that the path is unlikely to be smooth in terms of de-escalation going forward, and there's certainly the risk that we could see these further kind of setbacks along the way.
What are the key event lists to watch out for in the week ahead? Well, at the start of the week we'll be watching closely to see how the talks have progressed between the US and Iran over the weekend. Diplomats from both sides are expected to meet in Pakistan this weekend.
And that's going to be important given that the current fragile two-week ceasefires already showing signs of strain after Israel continued to attack Lebanon. And there also appears to have been little progress from Iran to allow more vessels to pass through the Strait of Hormuz. So if those talks were to disappoint, that could put a dampener on the investor optimism that we've seen over the past week and offer some support for the dollar.
Elsewhere here in Europe, we'll also be looking at the fallout from the parliamentary elections that are going to take place in Hungary this weekend. Going into those elections, the opinion polls have been pointing towards a widening lead for the opposition party, which is increasing the likelihood that Prime Minister Orban's Fidesz party will lose power and potentially bring an end to Viktor Orban's 16-year term as prime minister in Hungary. If that does materialize, I think that would be certainly welcomed by financial markets next week as the Fidesz party and Orban is likely to be replaced by the main opposition party, the Tisza party led by Peter Magyar.
I think that outcome would likely lead to a significant improvement in relations between Hungary and the EU and potentially opening the doors well to unfreezing of EU development funds, which would support growth in Hungary. We've already seen the Hungarian foreign strength in anticipation of this potential political change in Hungary, although obviously there is understandably still caution amongst investors that Prime Minister Orban could attempt to try to hold on to power. So that as well is obviously going to be important in determining to what extent the Hungarian foreign strengthens next week.
Thank you very much, Lee. Thank you.
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