Soaring energy prices increase fears about global economic growth and inflation. The IMF lowers the forecast because of the war. Analysts say that optimism in such a situation is in vain, as it may underestimate the remaining risks.
On Wednesday, the U.S. currency lost much of the gains made since the start of the conflict with Iran, approaching six-week lows. This happened amid reports of the resumption of talks between the US and Iran.
Following failed talks over the weekend, Washington imposed a blockade on Iranian ports. However, on Tuesday, US President Donald Trump said talks to end the conflict in Pakistan could resume soon. This boosted investor confidence and reduced demand for the dollar as a defensive asset.
The euro, having recovered from losses caused by the war, remained at around $1.1786 by the time of the last observation, close to the high recorded on March 2. The pound sterling also showed stability, holding steady at $1.356.
The dollar’s reputation will recover
The dollar index, which reflects the exchange rate of the U.S. currency against six other major currencies, has returned to the level it was before the conflict began on February 28. It was up 3% at the beginning of March.
The U.S. dollar was the main beneficiary of inflows into protected assets in March, but rising optimism about a possible ceasefire and resolution led to its decline of nearly 2% against other key currencies this month.
MUFG currency strategist Lee Hardman noted that it is too early to talk about the exhaustion of the dollar’s attractiveness as a protective asset.
“In the near term, we are cautious about further dollar depreciation as the market is optimistic and expects the situation to normalize faster than likely,” Hardman said.
Although the talks in Islamabad failed to produce significant results, raising doubts about the durability of the truce, which will last another week, investors remain hopeful of a successful diplomatic resolution to the conflict.
