Rabobank’s FX Strategy team notes the Dollar has recently been supported by both safe haven demand and shifting expectations for Federal Reserve policy. The bank highlights that improved prospects for a US–Iran peace deal and reopening of the Strait of Hormuz could reduce safe haven flows into the USD. However, a more hawkish-than-expected stance from new Fed Chair Warsh is currently underpinning the Dollar.

Safe haven flows versus Fed repricing

"Over the past few months, the USD has been driven both by safe haven flows and by a change in market expectations regarding Fed policy. Within a short space of time late yesterday both factors appeared to collide with the signing of the MoU by both the US and Iran coinciding fairly closely with the Fed’s policy meeting. This morning, the DXY dollar index is trading higher which may be signalling that the net impact of these divergent factors has been USD positive."

"The rise in the USD’s value at the start of the Iran war appeared to prove it remained a safe haven. These credentials have been up for debate since both the greenback and US treasuries dropped on the back of US President Trump’s tariffs address in April 2025. We have maintained that the desire for liquidity would preserve a safe haven bid for the USD in times of acute uncertainty, and that the USD’s sell off last spring was a function of years of the ‘buy America’ trade."

"This week has brought positive news on the potential for a peace deal and the re-opening of the Strait of Hormuz. The latter should result in a decline in safe haven demand, which has the potential to weaken the USD. However, the more hawkish than expected stance of new Fed Chair Warsh at yesterday’s Fed meeting has overwhelmed USD bears and revitalised the bulls, at least for now."

"Looking forward, the USD will be vulnerable if rate hike forecasts are pared back. That said, we remain doubtful as to whether the EUR has the ability to re-kindle strong upward momentum."

"It is Rabobank’s central view that steady rates will prevail this year. However, market pricing currently suggests scope for almost 40 bps of tightening on a 6-month view."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)