BMO: Dollar Strength Set to Persist Despite De-escalation Hopes

BMO Capital Markets argues the U.S. dollar will retain its dominant strength, even as markets cling to hopes of easing Iran-Israel geopolitical tensions. A unique macro backdrop of sticky inflation, slowing global growth and resilient U.S. data has structurally altered currency dynamics, rendering dollar longs the most favorable near-term FX play amid high interest rates and lingering price pressures.

Mark McCormick, Chief FX Strategist at BMO, states traders have priced in excessive near-term de-escalation optimism across the $9.5 trillion daily foreign exchange market. Even a ceasefire and subsequent oil price pullback would not quickly ease inflationary pressures, as lagged spillover effects will keep global rates elevated and weigh on growth — a macro setup that inherently favors the U.S. dollar.

“A marginal oil pullback is already a generous assumption, and inflation will not cool nearly as fast. Second-round effects are building, and asset correlations are shifting toward higher rates and a stronger dollar, rather than being driven by macro optimism,” 

McCormick noted.

Broad dollar bullish positioning

BMO maintains a full bullish stance on the greenback, recommending long positions against the euro, British pound and Japanese yen. The bank also sees solid upside for the dollar versus the Australian and Canadian dollars.

The dollar has already gained notable traction since late February, when U.S.-Israeli military actions against Iran began. The dollar’s key benchmark has risen roughly 2% over the period. While Middle East turmoil has disrupted global energy flows and pressured oil importers, the U.S. economy has proven resilient, withstanding elevated energy costs and delivering firm macro prints.

Data-driven repricing fuels dollar rally

Blowout May payrolls have forced a sharp hawkish reset in Fed policy pricing, with traders now fully pricing in at least one rate hike for 2026. The Bloomberg Dollar Spot Index posted its

strongest single-day gain in more than two months last Friday, while the policy-sensitive 2-year U.S. Treasury yield notched its largest daily surge since last April’s U.S. tariff announcements. The index edged slightly lower on Monday but retains firm macro-driven support.

Global inflation pressures are broadening, reinforcing the high-rate regime. Eurozone May inflation topped 3% for the first time since 2023, creating tighter policy constraints despite sluggish regional growth. Stateside, the highly anticipated May CPI report due Wednesday is forecast to rise to 4.2% year-over-year, up from April’s 3.8%.

McCormick emphasizes market drivers have shifted from transient geopolitical headlines to durable macro trends.

“Higher rates, softer growth and broader macro divergence remain the dominant narrative. This evolving regime will continue to benefit the U.S. dollar and support outperformance for U.S. assets. Headlines are noise; the new macro regime is the signal,”

 he concluded.