The US Dollar has managed to recover, backed by the Middle East conflict. Until now, all the troubles for the global economy originated in America, from trade tariffs to the US fiscal problems that undermined confidence in the greenback and deprived it of its status as the main safe-haven currency.
However, as soon as the epicentre of turmoil shifted, everything changed. The Middle East conflict is about to make the US dollar great again. The stability of foreign investors' holdings of Treasury bonds indicates continued interest in the American currency. While China was getting rid of Treasuries in April, Japan and Britain were buying them.
Rising oil prices are helping to shore up the USD index. As a result, the risks of inflation accelerating in the US and the chances of the Fed keeping interest rates high for a long time are increasing. Rumours are circulating on Forex that without de-escalation of the Israel-Iran conflict, the US dollar will not weaken significantly.
Stock indices: Stagflation is scarier than a war
At its June meeting, the Fed painted a stagflationary scenario. The central bank lowered its forecast for US GDP in 2025 from 1.7% to 1.4% and raised its inflation estimate from 2.7% to 3%. This scared the S&P 500 more than the war in the Middle East and the potential increase in tariffs after the end of the 90-day grace period. The broad stock index retreated but continues to trade close to record highs.
Donald Trump is trying to support the US stock market. He is calling on the Fed to cut the federal funds rate by 1–2.5 percentage points. The US president claims to have already collected $88 billion from tariffs while inflation remains low. However, his criticism of Jerome Powell is more likely to scare investors than inspire them to buy.
Markets are concerned about the White House's willingness to raise import duties after the 9th of July and the ongoing Israel-Iran conflict. According to RBC Capital Markets, if it drags on, the S&P 500 could fall by 20%. Deutsche Bank warns that a twofold increase in oil prices in the past has led to recessions in developed countries.
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