Dollar Declines as Trump Says Talks With Iran Underway

Summary

• Markets are primarily reacting to the duration and extent of the Iran-Israel conflict, with prices hinging on geopolitical headlines.
• Oil markets are expected to embed a permanent risk premium due to destroyed energy infrastructure, shifting the baseline price closer to $80 from $60.
• Outside of oil, other asset prices could revert to pre-conflict levels if positive developments like a ceasefire occur.
• Two key scenarios: a ceasefire leading to significant dollar selling pressure, or an escalated conflict involving more peers, causing market havoc.
• The U.S. dollar is tactically bid as a safe haven due to U.S. geographical insulation and energy independence, but an outright rally is unlikely.
• Evidence suggests past dollar sell-offs (e.g., from threats to invade Greenland) were stronger than current rallies from the Middle East conflict, indicating potential for intense dollar selling if tensions ease.
• FX markets remain macro-driven and are a better indicator of fundamentals, unlike gold, which saw retail investor participation and momentum trades.
• Investors are split and inactive in positioning due to high uncertainty, with no active risk-taking behind either scenario.
• The conflict's nature—with Iran showing unexpected military strength—has prolonged uncertainty, affecting midterm election dynamics and Fed policy considerations.