The U.S. Dollar’s Future: Balancing Geopolitical Risks and Financial Stability

We are looking at the US dollar trading flat to mix against the major currency pairs right now.

The US dollar index is hovering right below the $100 level, while in 2026, the ripple effects of the war in Iran rattling global currency markets and with Iran still controlling the Strait of Hormuz, oil prices are keeping central banks trapped in high.

Interest rate policies for much longer than anticipated and that has extended tightening that extended tightening is sparking real financial stability risks.

Meanwhile, we are continuing to keep an eye on a real scramble for global dollar liquidity.

Now joining us this morning to weigh in on what we're seeing across geopolitics and the ethics market is Elias Haddad, VP & Global Head of Markets Strategy at Brown Brothers Harriamn.

Good morning to you, Elias.

Thank you so much for joining us.

So let's start out on a broad note.

How quickly is this prolonged energy shock forcing the FX market to reprice the path of rates as we move forward into the rest of 2026?

Well, good morning to you, Remy, and thank you for having me on your show.

Always good to be here.

I mean, clearly right now the markets are waiting.

And on edge ahead of today's or tonight's deadline 8 p.m.

Eastern Time.

That's President Trump's deadline for Iran to agree on some kind of ceasefire and reopen the Strait of Hormuz.

Uh, now, uh, you know, I think Trump said also he doubts that we'll see, uh, that highly unlikely that there'll be a further extension to this deadline.

So clearly markets are in wait and see mode, uh, stable, uh, generally speaking, crude oil prices a little bit higher, uh, but, um, I think regardless of of Trump's deadline, really at this stage, you know, unless the US Controls militarily controls this critical Strait of Hormuz.

Iran effectively holds the escalation lever of this of this conflict, right, because as long as they control this strategic choke point, well, the risk to energy prices remain skewed to the upside, and unfortunately the balance of risks do point to a more prolonged energy shock, right?

Iran has both the capability and the.

Incentive to destabilize the global market and impose as much economic and political pain on the US to extract as much concessions as possible.

And one of the key concessions that is also, I believe, a red line for the US is Iran actually wants a recognition of sovereignty over the Strait of Hormuz, and that's going to be a no go.

And that means that there is a risk that this.

Uh, conflict, this conflict escalates, uh, regardless, regardless of the deadline, and that means that a more persistent energy shock, I think, raises, uh, financial stability risks because it does trap uh central banks in, I guess in in restrictive policy settings, despite an unimpressive growth outlook, and it also puts government debt on a more fragile.

An unsustainable path.

Um, and so that's why I think that the dollar tactically here is uh is is is poised to continue to benefit the longer this energy shock persists.

Now, from a cyclical perspective, I want to reiterate here, I know we've talked about this in the past, but, you know, I still think that from a cyclical perspective, the dollar's outlook is neutral.

Um, because of, as the dollar is trading, essentially has overshot the level implied by rate differentials, and structurally, and still bearish on the dollar, right, because of those three big structural drags on the currency.

You've got, you know, fading confidence in US uh uh um uh security and Trade policies, uh, you've got the lack of US fiscal credibility, and, uh, and finally, this ongoing, uh, politicization of the Fed policy.

But technically here, I think the dollar is poised to continue to benefit, not from safe haven flows, but from dollar funding need in a period of heightened financial market stress.

Yes, Elias, we are counting down to the market open here at the New York Stock Exchange, so we only have time for one quick question.

I do want to build on what you just said.

So the cross-currency basis is narrowing and growing more negative.

So what does that specific metric actually tell you about the stress that's building up in the global financial system?

Well, so far it's relatively contained, but it does suggest that the cost of borrowing US dollars in the forward market is increasing.

Um, uh, and if this continues, uh, well, that could lead to, uh, foreign investors scrambling for US dollar liquidity, uh, putting some, uh, near term upside pressure on, uh, on the US dollar.

So that's why I think that uh the the uh a key metric.

To, to, uh, gauge this, uh, uh, uh, this funding of this liquidity for dollar or as you point out, the cross-currency basis for dollar, for the euro dollars against the, against the yen, the euro, or the, the British pound.

And we have less than 60 seconds here.

So central banks are trapped in to keeping policy restrictive to fight off this oil-driven inflation.

What do you think it means for the major central banks and in turn the currency fairs.

Well, it's essentially neutral because, you know, as you saw, you know, most central banks' rate expectations have adjusted higher, not just in the US but across the, the, the, the G10, and even in some emerging market currencies.

So from a rate differential perspective, it's, it's essentially a wash uh uh at this stage.

But it does, what it does tell me, the rate differential story, what it does tell me at this stage is that right now the dollar is trading above the level implied by rate differentials, and that's going to limit any big US dollar upswing, and that's why I'm cyclically still neutral on the US dollar. we will have to leave it there for today, but always great talking to you.

Thank you so much for joining us and weighing in on the FX markets.

Thank you.