Goldman Sachs stated that the U.S. dollar strengthened in the first month of the U.S.-Iran conflict, prompting foreign official institutions to sell U.S. Treasuries.
Goldman Sachs strategist Isabella Rosenberg wrote in a report on Wednesday that the dollar is "one of the most meaningful drivers of foreign official U.S. Treasury demand after valuation adjustments." Foreign holdings of U.S. Treasuries declined in March from a record high, while the Bloomberg Dollar Spot Index rose by 2.4%, marking its largest monthly gain since July.
Rosenberg noted that these shifts appear to have occurred as some foreign governments sought to support their currencies and mitigate capital outflows during the conflict. She suggested this is likely a temporary pattern and does not indicate a structural shift in demand for U.S. Treasuries.
Following the U.S. and Israeli strikes on Iran in late February, the dollar benefited from demand for traditional safe-haven assets and the U.S. position as the world's largest oil producer. The conflict disrupted energy markets, heightened global inflation concerns, and pressured economies heavily reliant on imported energy.
Since the conflict began, among the 31 major currencies tracked by Bloomberg, the Indian rupee, South Korean won, Turkish lira, and Japanese yen have been among the 10 worst-performing currencies against the dollar.
"Central banks' efforts to maintain exchange rate arrangements typically indicate a strong willingness to continue pegging to the dollar and holding U.S. Treasuries over the long term," Rosenberg wrote. "Assuming the conflict ends, we expect a resumption of the dollar's weakening trend to provide a modest boost to foreign official demand for U.S. Treasuries; this trend had already begun to play a similar role before the conflict."
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