The U.S. dollar has relinquished most of the gains fueled by the Iran conflict, as a fragile ceasefire bolsters appetite for riskier currencies. However, investors indicate that strong demand for U.S. assets and diminished expectations for U.S. interest-rate cuts will prevent sharper declines.

The dollar index, tracking its strength against six major currencies, had surged over 3% to a 10-month high of 100.64 following the U.S.-Iran hostilities, which initially triggered a flight to safe havens. It has since retreated to 98.07, approximately 0.5% above its pre-conflict level.

While the dollar could see further retreat, analysts are skeptical it will break below this year's low of 95.55. This sustained demand highlights that investors still perceive U.S. markets as a sanctuary.

"For the dollar to keep breaking down, you basically need capital outflows from the U.S. or at least a reduction in the inflow of capital going into the U.S.," stated Joaquín Kritz Lara, chief economist and strategist at Numera Analytics. "We just don't see that happening."

Foreign holdings of U.S. Treasuries increased in January, driven by elevated yields and a reassessment of Federal Reserve rate cut expectations. Markets now anticipate at most one Fed reduction in 2026, down from prior expectations of two, as rising oil prices from the conflict add to inflation concerns.

"In the medium-term you care about the level of interest-rate differentials, and the level of interest-rate differentials are still very much in favor of the U.S. relative to Europe," Lara added, noting the yield advantage of U.S. assets over European ones.

Despite the dollar giving back its war-premium, analysts suggest geopolitical risk premiums are still in play. "Is there any reason for the dollar to be pricing in a zero geopolitical risk premium? I would argue not," commented Paresh Upadhyaya, director of market strategy at Pioneer Investments. Safe-haven demand could resurface if diplomatic negotiations falter.

Elias Haddad, global head of markets strategy at Brown Brothers Harriman, notes that while U.S. fiscal credibility and current account deficits weigh on the dollar, countervailing factors suggest it is unlikely to move significantly from its current level in the near term. "Over the next six to nine months, the cyclical backdrop for the dollar is neutral," Haddad concluded.