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With the dollar’s early war premium largely faded, the trajectory of the conflict in Iran is now a bigger driver than underlying economic data.
The U.S. dollar index—a gauge measuring the dollar’s value against its key rivals—rose 2.41% in March, when uncertainty about the war was at its peak. In the currency market moves are typically small, and this monthly gain marked the dollar’s largest rise since July 2025. As the initial scare from the war subsided, the dollar has fallen 1.34% so far in April.
Middle East tensions still persist but the outcome now seems more open-ended. A relatively less panicked environment has pushed investors away from the haven. It has also resulted in lower currency volatility, meaning currency swings are smaller as traders search for signals on the direction of the war.
For evidence, look at the Deutsche Bank FX Volatility Index, which measures the market’s expectation of future currency volatility. At 6.66 on Wednesday, it was significantly lower than at the start of the conflict. Considering the recent peak of 8.27 on March 27, the near 20% decline in the index in such a short span appears to be the sharpest drop since last April’s tariff tantrum.
“Uncertainty has weighed on FX volatility, which is falling,” wrote Société Générale’s veteran foreign exchange strategist Kit Juckes in a Thursday note titled “FX remains paralyzed by binary possibilities.”
“One wit blamed this on time zones – President Trump expresses views on social media after the European markets are closed and in the middle of the night in the Middle East,” wrote Juckes. Updates on the war have overshadowed economic data releases, such as PMI, or Purchasing Managers’ Index readings, in Australia, Japan, and Europe this week.
The data “provides a little colour about the way major economies are evolving during the crisis but any market impact that the data could have is offset by uncertainty about the war.” Juckes wrote. The euro and yen are the two most influential currencies in the dollar index.
The big question is what’s next? This focus on geopolitics won’t last all that long, according to Goldman Sachs strategists.
The dollar’s decline is happening against the backdrop of a U.S. stock market that has held up well, supported by continued growth in corporate profits as well as an economy that’s less dependent on energy imports, strategist Stuart Jenkins and team wrote on Monday. The U.S. is also a major oil producer.
This lower dependency and continued resiliency of the stock market through the ongoing earnings season would support the dollar even if the overall risk sentiment changes, he wrote.
Simply put, other factors could come to the rescue of the dollar once geopolitics fade. Until then, don’t hold your breath: Trump’s desire for a weaker dollar and investors who look at the conflict with overly optimistic glasses can keep the dollar down.
Write to Karishma Vanjani at karishma.vanjani@dowjones.com.