Yield Advantages and Inflation Expectations Floor the U.S. Dollar

The dollar index fell from a 10-month high of 100.64 to 98.07 as a tentative ceasefire in the U.S.-Iran war revived appetite for riskier currencies. This retreat follows a rush for safe havens that had pushed the currency to its peak. The dollar remains 0.5% above its pre-war level. The currency is unlikely to break through this year's low of 95.55. Surging oil prices from the war increased inflation, shifting market expectations for Federal Reserve rate cuts in 2026 from two reductions to one at most. Foreign holdings of U.S. Treasuries rose to $9.305 trillion in January. The 2-year German-U.S. bond spread sits at 1.135 percentage points. U.S. assets retain a yield advantage over European equivalents, providing a cushion that prevents the dollar from breaking meaningfully below its recent lows.