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### There’s three drivers of current Dollar strength and they’ll all fade going forward
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It might sound bonkers, but I think being a Dollar bear is still the right call. In my preview for the year, I outlined why I thought the Dollar would fall in 2026. On the surface, the war with Iran back has upended things but - as I’ll argue in this post - what’s driving current Dollar strength is transitory. I’m convinced that the Dollar is heading weaker and we get glimpses of this every once in a while. Just think back to the Treasury’s surprise buyback announcement in August. The Dollar plunged and precious metals soared. We’re living in the age of Dollar debasement. The war with Iran is just concealing this for now and no war - not even this one - lasts for ever.
I don’t want to sound like I’m trivializing the extent to which the Dollar has risen. The blue line in the chart above shows that the Dollar versus the G10 is the strongest since the botched reciprocal tariff rollout on April 2, 2025. That’s a remarkable turnaround for a currency that was written off a year ago. After all, the consensus back then was that the US was losing its reserve currency status and the Dollar was in the process of suffering irreversible damage. I wasn’t a fan of this narrative at the time and pushed back hard. But this doesn’t mean the Dollar can’t fall for cyclical reasons, which is what I’m talking about. As I see it, there’s three factors that are buoying the Dollar at the moment and all of them are transitory. They’ll fade with the end of the war with Iran, which means current Dollar strength is only a reprieve.
The three sources of current Dollar strength are:
* **Euro zone debt crisis:** there’s no doubt European debt dynamics are a disaster, but they’ve been exacerbated to a substantial degree by the rise in oil and other energy prices. Just think what’ll happen when war with Iran ends. Bond markets will rally across the board, including in France. This might even buy enough time for France to limp to next year’s election without a further escalation in its debt crisis. This would see global markets buy back some of the Euros they’ve sold. The Dollar would fall.
* **The hawkish Fed:** the war has made it difficult for the Fed to sound dovish. I’m an inflation dove myself and think Warsh was perfectly right to sound relaxed on this topic in the July 29 press conference. But - with all the uncertainty around oil prices - markets didn’t like this message and pitched a tantrum, forcing Warsh into his hawkish pivot at Jackson Hole. None of these contortions are necessary if and when the war ends. Markets will quickly scale back their expectations for Fed hikes and the second-guessing around the true intentions of Warsh will end too. As the blue line in the chart above shows, the recent Dollar rise is almost entirely explained by the rate differential of the US versus its G10 peers (black line). This differential will fall back as soon as the war is over and clamoring for hikes ends.
* **High oil prices:** the rise in oil prices since the start of the war is a symptom of something much larger, i.e. a sharp rise in geopolitical risk. That’s produced safe haven demand for the Dollar, which will fade as soon as the war ends. In my view, it’s this safe haven demand that’s been the biggest driver of Dollar strength since the start of the war and this’ll be the biggest drag on the Dollar once the war ends.
The war currently feels like yet another quagmire the US has gotten itself into. I wish we’d never started this whole thing, but I’m optimistic the blockade and US sanctions will help bring about an end to this conflict much faster than the consensus thinks. At the end of the day, this is why I remain a Dollar bear. No war lasts for ever. This one won’t either.
By Shadow Price Macro · Hundreds of paid subscribers
