Wall Street Warns Safe-Haven Dollar Rally May Have Peaked Amid Stock Market Surge
U.S. equities have extended their winning streak to 12 consecutive sessions. This relentless momentum is driving investors toward riskier assets, prompting Wall Street to warn that the dollar’s war-driven safe-haven rally may have run its course.
Institutions including Deutsche Bank and Wells Fargo argue that now is the time to short the greenback—and global investors appear to be following suit. According to data from State Street, demand for dollar hedging has climbed to its highest level in two years. Meanwhile, confidence in the dollar is beginning to fray within the options market.
Over the past week, the dollar surrendered most of its recent gains, retreating to levels seen in late February before the outbreak of the U.S.-Iran conflict. As its "safe-haven halo" fades, investors are refocusing on the headwinds that pressured the currency last year, specifically the outlook for Federal Reserve rate cuts.
Sentiment and Rotation Analysis
"We are seeing a clear rotation of capital away from safe havens like the dollar and into risk assets," noted Kathleen Brooks, Research Director at XTB. "If the U.S.-Iran conflict reaches a swift resolution, the dollar is poised for a period of sustained weakness."
However, the bearish case faces a reality check. While Pakistan attempts to mediate an extension of the U.S.-Iran ceasefire, tensions remain high. The fragility of these negotiations underscores the risk of turning bearish too early; a breakdown in talks could trigger a fresh spike in oil prices and derail expectations for Fed easing.
On Thursday, both the dollar and oil prices moved higher as the Strait of Hormuz—a critical artery for global energy—remained under dual blockade. Sustained high crude prices highlight another pillar of dollar strength: the market’s perception of the U.S. as a net energy exporter insulated from global supply shocks.
The Great Divide: Bulls vs. Bears
Citigroup currency analysts stated Thursday that from a risk-reward perspective, betting on dollar strength remains the superior trade. They argue that elevated commodity prices will cap gains in risk assets, thereby supporting bond yields and the dollar.
Conversely, Wells Fargo and Deutsche Bank maintain their "Sell" recommendations. Deutsche analysts project that the Euro could finally break above $1.20 from its current level of approximately $1.18—a milestone not seen since January. JPMorgan strategists added that the long-term trajectory for the dollar looks bearish, partly due to the massive fiscal burden of war expenditures.
Brooks further noted that beyond interest rate trajectories, emerging concerns regarding Federal Reserve independence could revive the "dollar devaluation" narrative. Additionally, some Wall Street analysts believe a second Trump term might prioritize a weaker dollar to bolster U.S. exports.