Improving macro backdrop set to keep dollar resilient, BCA says By Investing.com

Investing.com — The dollar’s underwhelming performance during the Iran conflict reflects fading geopolitical risk premiums rather than any structural erosion of confidence in the currency, BCA Research argues, adding that improving growth and interest rate dynamics should support the greenback over the coming quarters.

While the Federal Reserve’s broad trade-weighted dollar index has risen only about 1% since late February, the muted response is consistent with improving risk sentiment, BCA FX strategist Artem Sakhbiev said in a note. 

The dollar did rally 3% in March when energy prices and market stress were genuinely elevated, but measures of volatility and geopolitical risk have since retraced to pre-conflict levels as markets began pricing in an eventual resolution.

Sakhbiev flagged the reassertion of the dollar’s traditional countercyclical role as a key development in recent months. That relationship had broken down following Liberation Day last year, when the dollar moved in tandem with equities rather than acting as a safe haven, prompting a wave of hedging activity among global investors who had entered 2025 with record unhedged exposure to U.S. assets.

With the inverse dollar-equity correlation re-emerging since February, those hedge ratios have begun declining. A recent BIS study also showed euro-area equity fund hedge ratios close to 100% at the end of the first quarter, leaving limited room for further hedging-related dollar selling.

BCA sees the energy shock hitting foreign economies harder than the U.S. While the inflation impact of elevated energy prices tends to be immediate, “the growth drag tends to intensify several months later, particularly after inventory frontloading temporarily boosts demand,” Sakhbiev noted.

This dynamic is expected to weigh more heavily on the euro area, the U.K. and Japan than on the United States. Consensus GDP forecasts have yet to reflect this gap, the strategist said, pointing to further room for market repricing.

The rate outlook adds another layer of dollar support. As growth disappointments materialize abroad and inflation expectations normalize, Sakhbiev expects markets to price out foreign tightening, while the Fed stays relatively hawkish on the back of stronger underlying demand.

BCA is targeting at 102 over the next three to six months, though it maintains a strategic bearish view on the dollar beyond a 12-month horizon, noting that “the dollar’s longer-term downside remains substantially larger than its upside.”