The US dollar is expected to maintain its strong correlation with oil prices throughout 2026, as the ongoing conflict in Iran continues to keep crude prices elevated, according to a Markets Pulse survey conducted by Bloomberg.
In a survey of 124 respondents conducted from May 28 to June 3, more than half predicted that the correlation between the US dollar and Brent crude futures will strengthen, continuing the unusual pattern of the two moving in tandem. Over a third of respondents anticipated that both would decline together. The conflict in Iran, now in its fourth month, has seen significant escalation, pushing peace prospects further out of reach.
The Bloomberg Dollar Spot Index initially surged with the onset of the war as oil prices spiked, but has since moderated as crude prices retreated from their peak. The dollar's strength is supported by the US economy's resilience, its status as a safe haven, and rising bond yields, partly driven by expectations of a Federal Reserve interest rate hike later this year.
“The dollar has persistently traded above fair value as implied by rate spreads.”
Noah Buffam, CIBC Capital Markets strategist
Survey participants were divided on the future of 30-year Treasury yields, which hit a nearly two-decade high in May. While a third of respondents expect yields to end 2026 above 5% with Brent crude above $90 a barrel, another third foresee yields falling below 5% with oil prices under $90.
The survey also indicated a 68% chance that Brent crude futures will average over $90 a barrel from March through August, suggesting no significant price drop is expected soon. "The question now becomes less about what oil is doing, and more where is the damage done from an inflation and monetary policy perspective," said Vanda Research strategist Viraj Patel.
“Pressure from oil is clearly feeding into inflation worries and prompting traders to brace for the likelihood of higher borrowing costs in coming months.”
Kristine Aquino, Managing Editor, Markets Live
The jump in inflation due to the oil shock complicates the outlook for new Fed Chairman Kevin Warsh, who will lead his first FOMC meeting later this month. Historically hawkish, Warsh has recently adopted a more dovish tone, aligning with former President Donald Trump’s calls for lower rates. This stance suggests the Fed may remain in a wait-and-see mode this year, with survey respondents assigning a 45% probability to no change in monetary policy in 2026.
Background
The correlation between the US dollar and oil prices is significant due to the dollar's role as a global reserve currency and the pricing of oil in dollars. Historically, oil price shocks have had substantial impacts on global inflation and economic stability, influencing monetary policy decisions worldwide.
As the year progresses, market participants will closely monitor the interplay between oil prices, inflation, and monetary policy, with particular attention to the Federal Reserve's actions and the ongoing situation in Iran.
