By Martin Baccardax
The U.S. dollar has been quietly making a sustained advance on global currency markets amid a surge in global energy prices and a stunning comeback rally in the stock market.
The dollar's gains, in fact, could extend over the coming weeks, and start to weigh on domestic stock performance over the back half of the year, with the Iran war effectively closing the Strait of Hormuz and sending oil prices higher.
The U.S. dollar index, which tracks the greenback against a basket of six major global currency peers, was marked 0.06% higher on Wednesday and trading at 99.03, nearly at levels seen in early April.
The dollar index, in fact, has gained more than 3.5% since hitting its year to date low in late January, powered in part by rising crude prices and hotter inflation readings that have snuffed out hopes of a Federal Reserve rate cut for much of the coming year.
"Looking through the lens of strong economic data, equity outperformance, risks of eventual Fed hikes, and relatively clean positioning on aggregate, it's striking to us how low dollar sentiment appears," said Bank of America analyst Alex Cohen.
Cohen thinks investors are still betting on a near-term end to the war in Iran, and a reopening of the Strait of Hormuz, that will ultimately facilitate Fed rate cuts.
"But in the near-term, we question how much lower this can take the dollar, leaving the balance of risks pointing to the upside," he added.
That's a view shared by ING's currency and fixed income strategist Frantisek Taborsky, who sees a good portion of the dollar's recent gains tied to the slump in U.S. Treasury bonds, which has added more than 35 basis points to 10-year note yields over the month amid faster inflation readings and the Iran war.
"It's worth reiterating that, unlike in 2025, this bond market sell-off is being driven by inflation concerns rather than fiscal fears, making it unambiguously dollar positive," he said. "As a result, upside risks to dollar remain dominant unless genuinely constructive news emerges from the Gulf."
That's not anticipated at present, with President Donald Trump reiterating his threat of renewed attacks on Iran late Tuesday, and Islamic Islamic Revolutionary Guard Corps leaders warning on Wednesday that "if aggression against Iran is repeated, the regional war that had been promised will this time extend beyond the region."
Closer to home, the recent rise in the dollar, and its impact on both U.S. corporate profits and broader issues such as trade and trade deficits, presents a new and unexpected challenge for incoming Fed Chairman Kevin Warsh.
His focus on "regime change" at the central bank, with a focus on balance sheet reduction and longer-term productivity gains over backward looking inflation data, has given rise to the idea of a "Warsh trade" in currency markets that favors the dollar over peers such as the euro, the pound, and the yen,
But Steven Englander, head of global G10 FX research at Standard Chartered, sees a concern in Warsh's expected tactics, and the fact that faster inflation and commodity market pressures have pushed bets on a Fed rate cut well into early 2027.
"Warsh's confidence that the balance sheet can be shrunk or shifted to short-term assets as a counterweight to policy rate cuts may be misplaced," he said. "If reducing purchases of long-term government bonds pushes up Treasury and mortgage rates, cuts at the short end may not be enough to please the President or the Treasury Secretary."
A strong dollar has big implications for stocks, given that around a third of overall S&P 500 revenue, and a similar level of profits, are generated in overseas markets.
That figure starts to climb to around 50%, however, for the Magnificent Seven tech giants, including a near two-third reliance from Meta Platforms and a 53% tally for market leader Nvidia.
A firmer greenback lowers the value of overseas profits, once they're repatriated to the U.S., and persistent dollar strength could weigh on earnings forecasts that suggest a second quarter growth rate of 21.4% and full year advance of around 24%.
No Fed rate cuts, paired with a longer spell of U.S. troops in the Gulf and a prolonged closure of the Strait, are set to drive the dollar higher into the second half of the year.
It won't be long before stock performance starts to reflect that.
Write to Martin Baccardax at martin.baccardax@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
May 20, 2026 14:24 ET (18:24 GMT)
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