Bearish Dollar Thesis Faces Reset on Iran War Says Deutsche Bank

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Iran conflict casts shade on our bearish dollar thesis, Deutsche Bank's top FX analyst warns.

The war involving Iran has shifted the near-term balance of risks in favour of the U.S. dollar, according to Deutsche Bank's lead FX analyst George Saravelos, who says the conflict is beginning to challenge the bank's earlier view that broad dollar weakness would define 2026.

Saravelos says the year began with a constructive global growth outlook and a steady erosion of U.S. exceptionalism across growth, yields and equity performance, a mix that had pointed to a softer dollar.

But the energy shock unleashed by the conflict is now forcing a reassessment:

"To sum up, developments over the last two weeks have, on balance, been dollar bullish."

The dollar index - a measure of dollar performance - is 2.10% higher in March at 99.60, although it is yet to break the 100 barrier. That translates into a euro-dollar that is down 2.50% on the month at 1.1523 and pound-dollar at 1.3340 (-1.0%).

Despite the bearish dollar thesis facing significant headwinds, uncertainty remains too high for now to justify immediate changes to full-year forecasts at Deutsche Bank. Saravelos explains:

1️⃣ The first issue is the Strait of Hormuz and the flow of energy through it. Saravelos says the closer historical parallel is not Russia's invasion of Ukraine, but the shutdown of Nord Stream in 2022, when Europe faced a sudden drop in available energy supply.

"The longer the supertankers can't sail through the Strait of Hormuz, the higher energy prices will spike and the bigger the hit to global growth, especially Asia," he says.

That matters for currencies because weaker global growth and higher import bills are typically positive for the dollar, particularly when Asia, which Deutsche says is disproportionately important for broad dollar direction, is hit hardest.

2️⃣ The second issue is the fiscal response outside the United States. In 2022, Europe avoided recession partly because governments shielded households through subsidies and price caps.

Saravelos says a similar response now would reduce the shock's dollar-positive impact by supporting real incomes, containing inflation and allowing central banks outside the U.S. to keep real rates higher. That, in turn, could lend support to local currencies and offset some of the dollar's safe-haven and energy-driven gains.

3️⃣ The third issue is what Saravelos calls the "butterfly effects" of the war.

These include the risk that disruption to Middle East energy supplies spills into Taiwan's semiconductor production and, from there, into the global AI and credit cycle. From an FX perspective, Deutsche says the key transmission mechanism would be through Federal Reserve pricing.

"Any market event that pushes the US into a more dovish direction than the rest of the world may have a partially offsetting impact to the rise in energy prices," he says.

For now, Deutsche's conclusion is that the conflict has turned the dollar more supportive at the margin, but not in a way that yet justifies abandoning the broader debate about medium-term U.S. weakness.

In the meantime, Saravelos says the immediate market focus is simple.

"For now, we are watching the Strait of Hormuz just like everyone else."END