The US dollar may be on the verge of breaking out of its prolonged trading range as investors increasingly expect the Federal Reserve to prioritize inflation control amid rising geopolitical and energy-related pressures, Reuters reported.
The dollar, which weakened sharply in the first half of last year, has spent months moving within a narrow band, leaving markets uncertain about its next major direction. However, recent developments, including elevated oil prices linked to the Iran conflict and rising US Treasury yields, are beginning to shift sentiment in favor of the greenback.
The dollar index, which tracks the U.S. currency against six major peers, has climbed nearly 1.5% since late February, when tensions in the Middle East intensified following U.S.-Israeli strikes on Iran. The index was recently trading near the upper end of its year-long range, signaling the possibility of a stronger upward move.
Market participants believe higher Treasury yields are improving the dollar’s appeal. The 10-year U.S. Treasury yield has risen roughly 50 basis points since the conflict began, while the 2-year yield, closely tied to Federal Reserve policy expectations, has jumped nearly 70 basis points. Higher yields generally attract capital flows into dollar-denominated assets, supporting the currency.
Investors are also increasingly concerned that persistently high oil prices could reignite inflationary pressures globally. Since oil and gas are primarily traded in dollars, the U.S. currency tends to benefit during periods of energy-market volatility, particularly when the American economy appears more resilient than its global peers.
Strategists at major global investment firms believe widening interest-rate differentials between the United States and other developed economies could further strengthen the dollar against currencies such as the euro and Japanese yen. Analysts cited by Reuters noted that while European and Asian bond yields have also risen, the U.S. economy’s relative strength and the dollar’s safe-haven status continue to provide an advantage.
Even long-term dollar bears are moderating their positions in the near term. Some asset managers who remain concerned about structural issues such as U.S. fiscal deficits and high valuations have shifted toward a more neutral tactical stance because of current inflation and geopolitical risks.
Inflation expectations have also moved higher in recent weeks. Market-based long-term inflation indicators, known as break-even rates, touched their highest levels in three years earlier this month. Rising inflation expectations typically pressure bond prices and push yields higher, further supporting the dollar.
Attention is now turning toward the Federal Reserve’s upcoming policy meeting. Reuters reported that expectations for rate cuts under Fed Chair Kevin Warsh have faded as inflation concerns intensify. Investors increasingly believe the central bank could adopt a more hawkish tone if price pressures continue to build.
At the same time, geopolitical developments remain a major uncertainty for currency markets. Any meaningful resolution to the Iran conflict could ease inflation fears and reduce demand for safe-haven assets, potentially limiting further dollar gains. Until then, many investors believe the path of least resistance remains towards a stronger U.S. currency.
