The fragile ceasefire agreement between the US and Iran reshapes the foreign exchange market: Wall Street voices singing in unison, the "war premium" on the US dollar is rapidly unwinding.

Notice that, financial institutions such as Deutsche Bank and Wells Fargo recently stated that the fragile ceasefire agreement between the US and Iran has prompted investors to turn towards risk assets, and the safe-haven rebound of the US dollar due to the war may have already ended. These banks believe that it is now time to short the US dollar, and global investors seem to be thinking the same. According to data from Wells Fargo, investors have increased their hedging of the US dollar to the highest level in two years. At the same time, confidence in the US dollar in the options market has weakened, with positioning at its least bullish in several weeks. In March of this year, as the war disrupted global markets, the Bloomberg US Dollar Index soared, attracting investors to this traditionally seen as a safe-haven asset during times of crisis. However, in the past week, the US dollar has given back most of its gains, basically returning to the levels before the outbreak of fighting at the end of February. The conclusion is that as the safe-haven shine fades, investors are once again turning their attention to the factors that caused the US dollar to fall by 8% last year (the worst performance since 2017), including the prospect of interest rate cuts by the Federal Reserve. Research director Catherine Brooks from London brokerage XTB wrote: "Funds are clearly moving from safe-haven assets like the US dollar to risk assets. If the US-Iran conflict can be quickly and completely resolved, I believe the US dollar will face a prolonged period of weakness." Over the past year, the US dollar has mostly been under pressure. Since the ceasefire agreement between the US and Iran on April 7, the Bloomberg US Dollar Index has fallen by about 1.4%. During this period, risk-sensitive currencies such as those from Scandinavian countries, New Zealand, and Australia have risen by about 3% against the US dollar, while the S&P 500 index has recovered lost ground this week and reached a historical high. Pakistan is trying to mediate to extend the formal ceasefire deadline that expires next week, but the situation remains tense. The ceasefire agreement's fragility highlights the danger of shorting the US dollar too quickly, especially if the negotiations collapse, leading to a new surge in oil prices and delaying market expectations for a Fed interest rate cut. Support from the straits blockade On Thursday, as the vital oil supply channel, the Strait of Hormuz, remains in a state of "double blockade," both the US dollar and oil prices rose. The ongoing high oil prices highlight another reason for the recent strength of the US dollar - the market sees the US as an oil-exporting country that can withstand energy shocks. Foreign exchange analysts from Citigroup stated on Thursday that the risk-reward ratio favors betting on a stronger US dollar. They believe that the sustained high prices of commodities will limit the upside of risk assets, thus supporting bond yields and the US dollar. However, the relative easing of tension has reignited concerns about the US dollar that have lingered since Donald Trump took office as president. Strategists from Wells Fargo recommend buying the Swedish krona against the US dollar. Deutsche Bank, on the other hand, suggests selling a series of composite indicators for the US dollar, expecting the euro to eventually break above $1.20 for the first time since January (currently around $1.18). Strategists from JPMorgan also stated last week, "Looking at the medium to long term, conflicts seem to bode poorly for the US dollar," partly due to massive war spending. Independence of the Federal Reserve Brooks from XTB outlined some challenges facing the US dollar, apart from market expectations that the Fed will eventually cut interest rates (while other regions have expectations for rate hikes). She pointed out concerns about the market's view of the independence of the Federal Reserve. Trump threatened this week that if Chairman Powell does not "leave in time," he will dismiss him. This could lead to the President appointing an ally as interim chairman while waiting for nominee Kevin Warsh to be approved. Brooks said: "This could bring us back to the theme of 'devaluating the dollar,' a theme that heavily hit the US dollar last year." In addition, some on Wall Street believe that Trump wants to see a weaker US dollar to support US exports, although the current administration has repeatedly expressed support for the long-standing US "strong dollar" policy. Bearish views According to a model from Morgan Stanley, asset management companies increased their bearish bets on the US dollar in the first two weeks of April as market sentiment changed. A survey conducted by Bank of America from April 3 to April 9 (covering the initial phase of the ceasefire) showed that the second-highest confidence trading among fund managers this year (second only to holding bonds) was to short the US dollar. Bank of America strategists, including Ralph Fruth and Megan Swift, wrote in a report this week, "Investors believe that the Iran war is more of a cyclical fluctuation in the US dollar's trend for 2026 rather than a change in trend." International investors hedge the exchange rate risk of their US assets by shorting the US dollar through derivative products, which to a large extent may be a potential factor in the US dollar's weakening. As one of the world's largest custodian banks, data from Wells Fargo shows that investors are heavily buying this protection, pushing the hedging ratio of the US dollar to 63% after the ceasefire announcement. Furthermore, if the war is resolved and reduces concerns about economies outside the US, it may prompt investors to buy more international assets. Bayetta Manci, Citigroup's director of European equity strategy, said this week: "The driving factor for diversifying allocation trades still exists at the underlying level, just currently overshadowed by other worries."