According to Zhitong Finance APP, as the temporary ceasefire agreement between the United States and Iran has weakened the safe-haven demand that previously supported the US Dollar Index during the prolonged conflicts in the Middle East, international investors are increasing their hedging against potential declines in the dollar. With the significant retreat of safe-haven demand for the dollar, the market narrative is shifting back to the end of the so-called ‘American Exceptionalism’ doctrine, and global capital is revisiting strategies to short the dollar.
Just before global investors raised their dollar hedging ratio to a two-year high, a measure of cross-currency basis indicated that the additional cost for obtaining dollars in overseas markets rather than in the United States had been continuously declining in recent days. This suggests that market demand for the dollar is steadily diminishing.
Statistical data shows that the global investor hedging ratio against the dollar surged to 63% on April 10, hitting the highest level since the same month in 2024. The latest data compilation comes from Lee Ferridge, a senior foreign exchange strategist at State Street, one of the largest custodial banks in the global foreign exchange trading market.
Since the end of February, when the United States and Israel began military strikes against Iran, these indicators quickly moved in favor of the dollar—indicating that escalating conflict in the Middle East had dampened global financial market risk appetite, leading to a rush to secure dollar financing.
The strategy team at Nomura Securities believes that if the ceasefire holds and eventually leads to a permanent easing of hostilities, the long-term trend of de-dollarization—driven by increasingly unpredictable U.S. policymaking and deteriorating fiscal deficits—will resurface, with widespread selling of dollar-denominated assets likely to reemerge.
From Safe-Haven Appeal to Renewed Shorting: Was the Dollar’s Rally Just a Fleeting Moment?
One of the benchmark indices measuring the strength of the dollar, the Bloomberg Dollar Spot Index, was almost flat on Wednesday after having declined for seven consecutive days. The index has now nearly returned to its level on February 27, the day before the outbreak of the latest round of geopolitical tensions in the Middle East.
As the traditional core sovereign safe-haven currency during periods of geopolitical and economic turmoil, the dollar was one of the main beneficiaries during this round of Middle East geopolitical conflict and recorded its largest monthly gain in March since July. However, as peace talks between the U.S. and Iran continue to gain momentum, State Street’s statistical data indicates that hedging activities around the dollar have intensified, signaling that investors are reverting to the pre-conflict bearish view on the dollar as the dominant foreign exchange strategy.
As shown in the chart above, the surge in hedging ratios for U.S. assets has led to continued weakness in the dollar in recent days.
Ferridge stated, ‘Investors and professional traders who missed the opportunity to hedge the dollar in 2025 do not want to miss it again.’ ‘Now is an excellent time to start building medium-term short positions in the dollar.’
In 2025, the theme of seeking protection against dollar depreciation losses came to the forefront. At that time, the extensive and aggressive global tariff measures introduced by U.S. President Donald Trump caused panic among investors holding the U.S. dollar and drove the dollar index to its worst annual performance in eight years. Although investors did not withdraw significantly from all U.S. assets, they turned to various derivative instruments that could hedge against a decline in the dollar.
A year earlier, on April 2, 2025, local U.S. time, Trump appeared in the White House Rose Garden to announce a policy that would later become one of the most iconic of his second term. The U.S. President unveiled a long list of tariffs categorized by country, calling it his ‘Liberation Day’ global trade policy—a move that triggered widespread sell-offs and volatility in global financial markets at the time. Among the highly anticipated items on the tariff list were hefty levies on imports from many trading partners, including a 34% tariff on goods from China, 20% on those from the EU, and 46% on those from Vietnam.
The record-level market sell-off that followed swept through global assets — including major declines in U.S. stocks, U.S. Treasuries, and the U.S. dollar — which later evolved into the end of the so-called “American Exceptionalism” narrative and the emergence of the “Sell America” trading theme.
However, this year, the war in the Middle East caught the market off guard as many traders had heavily bet on a weakening of the dollar index at the beginning of the year. Now, forex strategists are reassessing risk scenarios for the dollar, such as the possibility that the Federal Reserve might still cut interest rates this year, while the market has also started to anticipate that other central banks will raise rates.
George Saravelos, Global Head of FX Strategy at Deutsche Bank, wrote in a report on Tuesday: ‘Conditions for re-shorting the dollar are gradually falling into place.’
Ron Temple, Senior Market Strategist at Lazard Asset Management, stated that 2025 marked the official beginning of the end for the narrative of ‘American exceptionalism.’ Temple noted that, as global investors reassess U.S. assets, a sustained and prolonged weakening of the dollar, alongside continued international selling pressure on U.S. Treasuries leading to a steeper yield curve, are highly probable milestones.
Ron Temple’s future outlook on investment strategies often sparks heated discussions in financial markets; he accurately predicted the timing of the Bank of Japan’s interest rate hike ending negative rates in 2024 and successfully anticipated in 2025 that emerging market equities would significantly outperform both U.S. and developed market stocks.
With the retreat of wartime safe-haven demand, pre-war expectations of dollar depreciation have regained dominance.
The latest core data and mainstream macro strategy outlooks overall favor the dollar returning to its pre-war trajectory of depreciation and weakness. If the market continues to price in an expectation of a more lasting ceasefire between the U.S., Israel, Iran, and Lebanon, the broader direction of forex trading strategies increasingly points to the dollar reverting to a path of depreciation and long-term weakness, indicating that ‘wartime safe-haven demand is fully receding, with pre-war depreciation expectations taking the lead.’
The most direct evidence is that the hedging ratio of global investors against the dollar, compiled by State Street, has risen to 63%, reaching its highest level since April 2024. Meanwhile, the dollar has largely given back most of the gains driven by the Iran war, with another benchmark dollar index (DXY) retreating from its wartime high of 100.64 to around 98 currently, only about 0.5% higher than before the war. This suggests that, as investor optimism grows over U.S.-Iran diplomatic progress, the market is unwinding the ‘wartime risk premium’ and returning to the pre-war narrative that was more bearish on the dollar.
From a macro perspective, the reasons for the dollar’s weakness are re-emerging. A stable rise in ceasefire expectations, the retreat of safe-haven demand, and the market’s renewed bets on the Fed eventually adopting a loose monetary policy stance are all pushing the dollar toward a weaker medium-term trajectory. George Saravelos, a senior strategist at Deutsche Bank, has even revived the framework for ‘re-shorting the dollar.’ Former U.S. Treasury Secretary and former Federal Reserve Chair Janet Yellen explicitly stated this week that, despite the broad supply shock and rising inflationary pressures caused by the Iran war, she still believes rate cuts later this year remain possible. This implies that even with the negative impact of high oil prices, the Fed may not completely close the door on easing monetary policy within the year.
