BCA Research interprets the dollar's subdued performance throughout the recent Iran conflict as a sign that geopolitical risk premiums have faded, not evidence of lasting weakness in the currency. The research house argues that improving global growth and interest-rate dynamics should provide support for the greenback over the next few quarters.
In a note, BCA FX strategist Artem Sakhbiev highlighted that the Federal Reserve's broad trade-weighted dollar index has climbed by only about 1% since late February. That limited move, he said, is consistent with an environment of improving risk sentiment.
The dollar did post a sharper move in March, rallying about 3% at a time when energy prices and market stress were notably elevated. However, measures of volatility and indicators of geopolitical risk have since eased, retracing to levels seen before the conflict as markets began to price in an eventual resolution.
Sakhbiev also pointed to the restoration of the dollar's traditional countercyclical relationship with equities as a key development. That pattern had broken down after Liberation Day last year, when the dollar moved in lockstep with equities instead of acting as a safe-haven asset. That episode prompted widespread hedging by global investors, many of whom had entered 2025 with record unhedged exposure to U.S. assets.
Since February, the inverse correlation between the dollar and equities has begun to re-emerge, and hedge ratios have started to fall. Sakhbiev noted further support for reduced hedging-related dollar selling from a recent BIS study that found euro-area equity fund hedge ratios close to 100% at the end of the first quarter, which leaves little room for additional hedging flows to push the dollar lower.
Another important dynamic cited by BCA is the asymmetric impact of the energy shock across major economies. While higher energy prices tend to lift inflation immediately, the growth drag typically becomes more pronounced several months later - particularly after inventory frontloading temporarily lifts demand.
"The growth drag tends to intensify several months later, particularly after inventory frontloading temporarily boosts demand," Sakhbiev wrote.
BCA expects this pattern to weigh more heavily on the euro area, the U.K. and Japan than on the United States. The strategist suggested that consensus GDP forecasts have not yet fully priced in this divergence, leaving scope for further market repricing.
The outlook for interest rates adds an additional layer of potential dollar support. According to BCA, as growth disappointments appear in other economies and inflation expectations normalize, markets are likely to push back on expectations of foreign policy tightening, while the Fed could remain relatively hawkish owing to stronger underlying U.S. demand.
On a tactical horizon, BCA is targeting the DXY at 102 over the next three to six months. The research house, however, retains a strategic bearish view on the dollar beyond a 12-month timeframe, noting that "the dollar's longer-term downside remains substantially larger than its upside."
Implications for markets
- Currency markets - A stronger near-term dollar could pressure non-U.S. currencies, particularly in the euro area, the U.K. and Japan.
- Equities - Re-emergence of the dollar's safe-haven role may influence hedging demand and equity flows, given recent changes in hedge ratios.
- Fixed income - Divergent rate expectations between the Fed and other central banks could drive relative yields and capital flows.