The U.S. dollar has strengthened significantly against currencies of energy-importing economies, particularly the euro, since the start of the war in the Middle East, reflecting the United States’ position as a major energy exporter and its relative resilience to shocks in oil and gas prices.
In a baseline scenario in which the conflict ends quickly, the euro is expected to reach a low point against the dollar before recovering to around $1.18 within a year, down from a previous forecast of $1.22. In a scenario of prolonged disruption to energy supplies, however, the dollar could continue to strengthen in the short term.
Despite recent gains, a sharp and sustained surge in the dollar similar to that seen during the 2022 energy crisis is not expected. Key differences include the dollar’s already elevated valuation and signs of cooling in the U.S. labor market, which could lead to interest rate cuts by the Federal Reserve.
While the dollar may continue to strengthen as long as energy prices remain high, the trend is expected to reverse once energy market pressures ease and the Fed begins lowering rates.
Gold, meanwhile, is expected to strengthen, with a forecast of about $5,400 per ounce over the next year.
Gold rose about 14% during the Russia-Ukraine war in 2022 but later fell roughly 20% amid aggressive rate hikes by central banks. It is currently facing some pressure due to expectations of tighter monetary policy linked to energy market shocks tied to tensions with Iran.
However, demand for gold is now broader and more resilient than in the past, with significant purchases by central banks alongside flows from exchange-traded funds. A shift by the Federal Reserve toward rate cuts is expected to support prices.
Kiran Kowshik is a global foreign exchange strategist at Lombard Odier.