US dollar could stay strong for most of 2026

The Iran war is reinforcing a market conviction already building around US monetary policy: interest rates are likely to stay higher for longer.

The escalation in the Middle East is compounding expectations that the Federal Reserve will hold rates steady for several more months, pushing the first meaningful rate cut further into the year.

Markets are pricing a very high probability – about 97% – that policymakers will keep rates unchanged at their upcoming meeting, with most investors broadly expecting the first reduction no earlier than July.

Energy markets react first in geopolitical crises, and the current escalation has pushed oil prices higher amid concerns about disruption in the Gulf, a region that handles a significant share of the world’s crude supply. Rising energy costs feed quickly into inflation expectations across the global economy.

For the Fed, inflation risk remains the central constraint. Price growth in the US has eased from its earlier peaks but still sits above the central bank’s long-term target. Any sustained rise in oil or gas prices risks slowing the disinflation process further.

Markets understand the implications: higher energy prices increase the likelihood that policymakers will remain cautious about cutting borrowing costs. The Iran conflict therefore strengthens an existing market view that interest rates are likely to remain unchanged for several more months.

In other words, the war is not creating the “higher for longer” narrative; it’s reinforcing it.

Before the escalation, investors already believed the Federal Reserve would move slowly. Inflation has proved persistent, the US economy continues to show resilience, and the labour market remains relatively tight. Policymakers have repeatedly indicated they want stronger evidence inflation is firmly returning to target before easing policy.

Geopolitical risk strengthens the argument for patience.

Energy shocks have historically complicated the work of central banks. When oil prices rise quickly, they ripple through transport costs, production chains and consumer prices. Even if the impact proves temporary, policymakers remain wary of loosening policy while inflation risks are rising again.

The result is a monetary policy outlook that supports the dollar.

Currency markets revolve around relative returns. As long as US interest rates remain higher than those in most developed economies, global capital continues to flow toward dollar-denominated assets.

The yield advantage is substantial.

Government bond yields in the US remain significantly above those in Europe and Japan. For global investors seeking income, US Treasuries offer both higher returns and deep liquidity. Pension funds, sovereign wealth funds and asset managers adjust allocations accordingly.

Every allocation into US bonds requires the purchase of dollars.

The scale of the US financial system magnifies this dynamic. Treasury markets can absorb enormous volumes of capital with minimal disruption. When geopolitical tensions rise, investors seek liquidity, depth and perceived safety.

Periods of global uncertainty reinforce the dollar’s role at the centre of the financial system.

The Iran conflict therefore strengthens two forces supporting the currency at the same time: geopolitical tension pushing investors toward safe-haven assets, and inflation risks associated with rising energy prices reinforcing expectations that US interest rates will stay elevated.

When both dynamics operate simultaneously, currency trends often persist longer than many anticipate.

The consequences extend far beyond foreign-exchange markets.

A stronger dollar tightens global financial conditions. Many governments and corporations around the world borrow in dollars. When the currency rises, servicing that debt becomes more expensive in local terms.

Emerging markets often feel the strain first. Currency depreciation can increase borrowing costs, discourage capital inflows and put pressure on domestic financial systems.

Global companies also face challenges.

Multinationals earning revenue in multiple currencies must translate foreign earnings back into dollars. When the dollar strengthens, those earnings shrink in dollar terms, forcing revisions to profit expectations.

Commodity markets are affected as well. Most commodities trade in dollars. When the currency rises, buyers operating in other currencies effectively face higher prices, which can dampen demand across global supply chains.

For those holding international assets, exchange rates become a major driver of performance.

Currency movements can amplify gains or erase them entirely. A rally in overseas equities may translate into smaller returns once converted into dollars during a period of sustained dollar strength.

Interest rates, inflation expectations and geopolitics are aligning in a way that historically supports the US dollar for extended periods. The Iran conflict is adding fuel to a dynamic that was already building across global markets.

Higher oil prices, persistent inflation, and a Fed unwilling to cut rates prematurely, form a powerful combination.

As such, for now, at least, I believe the trajectory of global capital still points firmly towards the dollar.