The US dollar strengthens in two cases: when everything is going poorly, and when everything is going well. This is known as the "dollar smile" theory. Something intermediate is not for the greenback. In this regard, the conflict in the Middle East has created the necessary conditions for a rally in the USD index. However, no asset can rise indefinitely, and central bank meetings have prompted investors to think about that.

There is no doubt that the US dollar is the main safe-haven asset. The rise in demand for it following the attacks by the US and Israel on Iran is direct evidence of this. At the same time, the greenback also plays the role of a high-yield currency. The maintenance of high rates by central banks, led by the Fed, and the hints of further increases create a favorable environment for such assets. When combined with positive factors for the USD index, such as rising oil prices, it is easy to see why the USD index is rallying as the conflict in the Middle East unfolds.

Dynamics of the Correlation Between the US Dollar and Oil Prices

However, the upward path rarely goes without bumps. Donald Trump's statements about the imminent end of the war in Iran and his demands for the Fed to lower the federal funds rate at an emergency meeting are causing EUR/USD bears to retreat. The euro is rising, partly due to expectations that the ECB will confirm market forecasts of a rate hike on deposits by June. However, the celebration on the street for fans of the main currency pair is unlikely to last long.

Approximately 1,100 tankers remain trapped in the Strait of Hormuz, Tehran suppresses dissent within the country, and attacks the energy infrastructure of Persian Gulf nations. Israel is eliminating the leaders of its adversaries, while the US threatens to deploy ground troops. There can be no talk of de-escalation of the conflict. After a slight tactical retreat, the US dollar is preparing to resume its attacks amid rising demand for safe-haven assets and currencies of net-exporting energy countries.

Correlation of G10 Currencies with WTI Oil Prices

Against this backdrop, whatever happens at the March Fed meeting will have little significance for the medium-term prospects of EUR/USD. If the central bank shows in its updated forecasts one act of monetary easing in 2026, and Jerome Powell speaks at the press conference about the need to remain cautious due to the events in the Middle East, the US dollar will continue to strengthen. Conversely, dovish rhetoric from the Fed will provide temporary support for the euro and become a basis for selling it against the greenback on rallies.

Technically, on the daily chart, EUR/USD is testing key resistance at the 1.154 pivot level. The risks of a successful assault and consolidation above this mark appear minor. Conversely, a rebound will provide the basis for forming short positions in euros against the US dollar, with the idea of a swift return to the downward trend.