The USD has strengthened sharply through the final week of March, with month-to-date gains extending across all G10 currencies. The outbreak of hostilities between the US and Iran on February 28 initially triggered a classic flight-to-safety bid, but the rally has gathered momentum as Treasury market dysfunction and diverging central bank outlooks have reinforced dollar dominance.
The GBP has proven the most resilient, declining 1.66% against the greenback, supported by a hawkish repricing at the Bank of England. The CAD (-1.82%) has held up relatively well despite the Bank of Canada holding rates at 2.25% on March 18, with Governor Macklem emphasizing readiness to respond to evolving conditions. Oil prices remaining elevated above $100/barrel continues to underpin the loonie even as the USD strengthens broadly.
The European complex has fared worse. The euro (-2.61%) has retreated decisively below its 200-day moving average as markets removed rate cut expectations from ECB pricing while growth concerns mount. The yen (-2.65%) has suffered as a net energy importer facing elevated import costs and widening yield differentials.
The commodity bloc has experienced a dramatic reversal from earlier in the month. The AUD (-3.37%) has sold off sharply despite initial resilience, reflecting risk-off sentiment and concerns about Chinese growth spillovers. The NZD (-4.19%) has underperformed most significantly, bearing the brunt of deteriorating global risk appetite and terms of trade pressures.
Most striking remains the Swiss franc's decline (-3.78%), which has underperformed even the euro despite real Swiss rates hovering around 0%. This suggests markets are taking SNB intervention threats seriously, or that traditional safe-haven mechanics are expressing differently in this conflict, perhaps through USD and Treasury channels rather than CHF appreciation.
The current geopolitical environment presents a classic FX conundrum: war is typically bullish for the USD, until the structural costs begin to outweigh the immediate liquidity demand. We are witnessing a paradox in which conflict strengthens the USD’s short‑term position through crisis hedging while simultaneously eroding the institutional foundations of its long‑term dominance.
For the first time in recent memory, US Treasuries are not behaving as the unquestioned safe-haven: wartime spending and renewed domestic stimulus are driving larger fiscal deficits, while a run of “ugly” Treasury auctions and softer bid‑to‑cover ratios hint at growing investor fatigue with absorbing ever‑increasing US debt supply.
About $9.2 trillion in US Treasuries rolled over in fiscal 2025, roughly a third of all outstanding federal debt, and the 2026 refinancing wave is already building. Annual interest payments on the federal debt have crossed $1 trillion for the first time. The Treasury is buying back its own debt in tranches to keep the market from seizing up. But the 10-year yield keeps moving higher regardless.
The old Tina narrative “there is no alternative” around US large‑cap growth and USD assets is fading at the margin. Markets are effectively running two playbooks at once, reaching for USD safety today, but quietly preparing for a post‑war world in which reliance on USD‑denominated assets may be less automatic than it has been over the past decade.
The “fog of war” has significantly clouded the path for global monetary policy, with sharp volatility in energy prices reigniting fears of “higher‑for‑longer” inflation and derailing market hopes for aggressive rate cuts in 2026. Central banks are now caught in a difficult position.
The Fed's March decision was particularly consequential. Markets have largely abandoned expectations for aggressive rate cuts this year, with consensus shifting toward a single 25bp cut in September at most, leaving the terminal rate at 3.50%. This repricing has provided crucial support for the USD, which entered the conflict heavily shorted by asset managers.
The Bank of Canada held its policy rate at 2.25% on March 18, marking its third consecutive pause. Governor Macklem made clear the Governing Council is monitoring the Middle East conflict closely, stating: "As the outlook evolves, we stand ready to respond as needed". While markets had briefly priced hike probabilities earlier in the month, weak February labor data and cooling core inflation have pushed those expectations back, with economists now forecasting rates to hold at 2.25% through 2026.
In Europe, the ECB acknowledged it has moved from "a good place" to a more complex environment featuring upside inflation risks and downside growth risks. President Lagarde made clear the Governing Council is prepared to respond to energy-driven price pressures. The Bank of England similarly shifted to a more hawkish stance, with markets now pricing potential tightening rather than the cuts anticipated just months ago.
Meanwhile, in the rest of the G10, the RBA stands out, delivering two consecutive 25bp hikes as sticky domestic inflation prompts pre-emptive action against energy shocks, helping AUD hold up better than most. JPY suffers from BoJ gradualism and import costs, while CHF weakness signals markets pricing SNB intervention risks.
Looking ahead to the coming month, the focus will remain firmly on three intertwined themes: the trajectory of the war, the response function of central banks, and the evolution of the “USD dominance” narrative. Any credible path toward de‑escalation in the Middle East would likely take some steam out of the USD rally, especially against high‑beta currencies that have underperformed on risk aversion. Conversely, a further escalation that pushes energy prices significantly higher would hurt energy importers (EUR, JPY, NZD) and could extend the current pattern of USD strength and CAD/AUD resilience. On the policy front, markets will scrutinize whether the Fed continues to lean toward eventual easing despite wartime inflation pressure, and whether the ECB and BoE can afford to talk up cuts without undermining their currencies. The Bank of Japan’s pace of normalization and any fresh signals from the SNB on the franc will also be critical for the low‑yielders.
This environment argues for humility on big directional USD calls and a focus on relative stories and risk management. On one side of the ledger, the war‑driven demand for liquidity, higher US yields and better relative growth still support the USD in the near term. On the other, the combination of widening US deficits, questions around the depth of foreign demand for Treasuries, and a gradual search for alternatives, whether through real assets, non‑US equities or a more diversified reserve mix, keeps the medium‑term “post‑peak USD” thesis alive.