Daniel Mitchell - Managing Director & Senior Portfolio Manager, Global Fixed Income & Currencies

How has the currency market performed during the Iran conflict?

We're now in the seventh week of this Iran conflict and in response to news of a possible ceasefire, equity markets have recovered most of the losses. In similar fashion, currency markets have done the same. When we break down the currency moves since the beginning of the conflict, we can kind of segment into four different phases.

The first and second were dollar positive, and the last two were dollar negative. Phase one really started in the first few days of the conflict, and it was characterized by really a reduction of positions and stop losses. We saw the U.S. dollar rally quite significantly and very quickly as investors closed out their emerging market risks, selling emerging market currencies to buy back the dollar.

In phase two, we saw a continuation of U.S. dollar strength as investors really focused on what we call terms of trade differences. Investors wanted to be long of oil exporters that were benefiting from higher crude prices, and the oil importers were really being targeted as the more vulnerable currencies at a time when crude prices had spiked.

Again, the dollar here fared pretty well just because of its energy independence. But all together, between phase one and phase two, we've seen the U.S. dollar rally and the currency moves and effects broadly actually were fairly muted. The greenback rallied by 3% on a trade-weighted basis, which is fairly small in the context of a regular month's worth of currency volatility, and extremely small in the context of just how important the Strait of Hormuz is geopolitically. In a way, some would say we've come full circle here on the dollar. Markets are now beginning to look forward beyond the conflict for the longer-term implications. This is what we what we think might mark the beginning of phase four of the currency market reaction, where investors are looking back to the same theme that was very popular in 2025 - this theme of dedollarization. The consensus seems to be that the dollar will end the conflict on a weaker footing than it began. There's a couple of reasons why that might be. First, wars are expensive. The U.S. has spent a lot on missiles on sending ships to the Middle East, and this has aggravated an already poor fiscal stance for the United States. Second, you could say the conflict has lessened the Kerry appeal, or the interest rate appeal, of the U.S. dollar as other central banks have been quicker to talk about interest rate hikes than the Fed has, amid this period of higher inflation.

We could also argue that the U.S. has lost some credibility in exerting its soft and hard influence globally, in that it has been pulling back from global institutions like the World Trade Organization, the World Health Organization, NATO as well, and most recently just refusing to secure the global security of shipping routes.

The next one is that we're seeing liquidation of U.S. treasuries from global reserve holders in the Middle East and Asia. Those are the two biggest holders of foreign exchange reserves as those regions either try to subsidize high fuel prices or support their currencies in this time of volatility. And then finally, there's this emerging longer-term threat to the U.S. dollars role as a global reserve currency and its use in global trade if Iran decides to trade their oil in renminbi terms or charge a toll for the use of the Strait of Hormuz, and demand renminbi payment. No doubt there will be additional items added to that list, but I think the focus here is that investors are increasingly looking at those dollar negative implications of the war, and that'll keep a lid on the U.S. dollar for now.

Which currencies should fare best if a peace deal is achieved?

Well, clearly this Iran conflict isn't over yet, and we wouldn't be surprised to see the dollar rally again and for foreign exchange volatility to return. We think those would be good opportunities to sell the dollar and buy emerging market currencies. Our working assumption here is that both parties to the deal, or in the conflict, are incented to make a deal and reopen the Strait of Hormuz.

We think if that outcome materializes, emerging market currencies would be the best beneficiaries of that outcome. For our part, we're likely to be a little bit more selective about which emerging market currencies we choose to buy. Whereas previously we were optimistic on the broad spectrum of emerging market FX. These days I think we'll be favoring some of the commodity exporters, and perhaps maybe a little bit more cautious on the oil importing currencies.

What are your expectations for the Canadian dollar?

Well, interestingly, the Canadian dollar has traded a lot more like a mini-U.S. dollar and has shed its behavior as a Petro currency, or a growth currency. Throughout the conflict, it has traded in a more stable fashion, which has given Canadians maybe a better opportunity to buy foreign currencies and better purchasing power in accumulating foreign assets.

The loonie did weaken a little bit in late March. On a Dollar-CAD exchange rate, it reached 1.39 to 1.40, which is a level that we think is and remains a good level to be increasing hedges on U.S. dollar denominated assets. We do think the Canadian dollar will benefit from the U.S. dollar weakness and will rally in the rest of this year.

 Our forecast for the loonie this year, 1.30 per U.S. dollar, though we do expect that the Canadian dollar may underperform other currencies within the G10 and within emerging markets in particular.