by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with our views on the latest central bank rate decisions and their implications for the dollar. We then examine why the US and Israel may be seeking a way to transition the conflict into its next phase. In addition, we discuss why Washington has ruled out an export ban and highlight fresh signs of distrust between the US and its allies. As always, we also include a summary of recent US and international economic data releases.

A Global Pause: In the same week that the Federal Reserve signaled that it would not rush to judge the war’s impact on the US economy, several other major central banks followed suit. On Thursday, the Bank of Japan, the Bank of England, the European Central Bank, and the Bank of Canada all kept policy rates on hold. Their decisions reflect uncertainty about whether the conflict will have a short- or long-term effect on inflation and the economy, and these decisions are expected to shape market views of the dollar.

• The choice to remain on hold comes as central banks grapple with the severity of the war’s impact on the economy. ECB President Christine Lagarde stated that while she believes the EU can absorb economic shocks, she is no longer confident that the economy remains in a strong position. Additionally, Bank of Canada Governor Tiff Macklem noted that the Middle East conflict has increased downside risks to the global economic outlook.
• That said, there are signs that some central banks may pivot toward additional rate hikes if inflation shows signs of re‑accelerating. Bank of Japan Governor Kazuo Ueda has reiterated that the bank still expects to raise interest rates, judging inflation risks to be more pressing than growth concerns. At the same time, the Bank of England has adopted a more hawkish tone, signaling a renewed focus on inflation risks in its policy deliberations.
• A potential shift in monetary policy is also likely to influence foreign exchange markets. When investors expect foreign central banks to adopt a more hawkish stance than the Federal Reserve, their currencies tend to appreciate against the dollar, and the reverse is true when they are seen as more dovish. As a result, the dollar could weaken if other central banks are viewed as more assertive than the US in responding to inflation.
• Futures markets have so far priced in a hawkish pivot globally as investors react to rising inflation risks. Following the recent central bank meetings, futures now imply that the US has shifted from one rate cut to holding steady, while expectations for the BoE and ECB have moved from unchanged policy to as many as two hikes this year. By contrast, the implied probability of a rate hike by year-end for the Bank of Canada and the Bank of Japan has remained largely unchanged.
• In the near term, the dollar is likely to find support as investors raise cash and seek safety amid sharply higher oil and energy prices. However, this strength could fade once the conflict begins to stabilize, particularly if the Federal Reserve rules out the possibility of further rate hikes. In that scenario, a weaker dollar could re‑emerge over time, depending on how the situation in Iran evolves in the coming weeks.

US Reinforcements: Now entering its third week, the conflict with Iran appears to be shifting into a new phase. On Thursday, the Pentagon submitted a $200 billion supplemental funding request to the White House to continue ongoing military operations. At the same time, several US allies pledged formal support for Washington’s efforts to secure and reopen the Strait of Hormuz. The shift follows Israeli assessments that the campaign has effectively destroyed much of Iran’s uranium enrichment and ballistic missile infrastructure.

• The proposed surge in defense spending is expected to receive a cool reception on Capitol Hill. Defense Secretary Pete Hegseth said the funds would be used to replenish critical weapons and ammunition expended in the campaign, likely pushing stocks above prewar levels. House leaders have signaled that they are prepared to take up the legislation, but its passage is far from assured, given the GOP’s slim majority and Democrats’ outright opposition.
• Internationally, NATO partners appear eager to ease tensions with Washington by committing to help secure the Strait of Hormuz. On Thursday, seven allies — the UK, Japan, France, Germany, Italy, the Netherlands, and Canada — joined a pledge to take appropriate measures to ensure safe passage through the waterway. Although the statement did not explicitly commit naval forces, it signals a growing willingness among these countries to coordinate military efforts to protect vital sea lanes.
• The escalating costs of the war may be pushing the US and Israel toward a point where declaring victory becomes an appealing option. However, whether this happens within days remains unclear, as it would likely require a settlement that leaves the current Iranian regime in place — a prospect that seems improbable given the ongoing attacks. Furthermore, even if a declaration is made, there is no guarantee the conflict will not reignite, particularly given the network of Iranian proxy groups across the Middle East.
• While a de-escalation should reduce geopolitical uncertainty and offer some relief for equities, attention will quickly shift to logistics. Reopening trade routes, restoring production, and preventing a spike in interest rates driven by higher inflation expectations and heavier debt issuance are likely to become key priorities. In this environment, firms that are less energy-intensive and carry relatively low debt burdens should be better positioned to benefit from the transition.

No Export Bans: The White House has so far ruled out imposing a ban on crude oil and natural gas exports to keep domestic energy prices in check. The decision comes as the Trump administration explores ways to cushion households from the economic fallout of the conflict. While an export ban could lower prices at home, it would likely drive them higher globally. The refusal to take that step may increase pressure on Washington to pursue diplomatic off-ramps to the war instead.

NATO Tensions: Denmark was preparing for the possibility of a US invasion earlier this year. The government sent soldiers with explosives to Greenland to destroy a runway near the capital, as well as a former fighter base, if necessary. They were also supplied with blood reserves in case they were forced to confront US forces. This approach was backed by France and Germany, underscoring growing distrust of the US among key allies. We believe this could signal that Europe intends to become less dependent on the US for its security.

View PDF