Navigating FX volatility
The first quarter of 2026 highlighted just how unpredictable currency and precious metals markets can be. Geopolitical shocks, changing expectations for central bank policy and shifting economic fundamentals have all contributed to sharp price swings and greater uncertainty.
In this environment, it pays to look past daily headlines and focus on the deeper trends shaping long-term outcomes.
De-dollarisation
The US dollar remains central to global finance, but its dominance is being tested. In recent months, the dollar has rallied, supported by higher energy prices and the US position as a net energy exporter. This has offered short-term support, especially as investors sought safety during events like the conflict in Iran. Yet, beneath this surface strength, structural challenges are hard to ignore.
USD real effective exchange rate index
Source: Pictet Wealth Management, Bloomberg L.P., as at 31.03.2026
Concerns about the sustainability of US public finances are growing. The costs of ongoing conflicts and rising deficits are likely to weigh further on the US budget, while the Federal Reserve is expected to be more accommodative than other central banks. While demand for the US dollar remains strong for now, these underlying issues could limit its strength over time.
US exceptionalism has been the mantra for decades.
What if this virtuous equilibrium no longer holds?
Source: Pictet Wealth Management, Bloomberg Finance L.P., as at 28.04.2026.
The move away from the dollar – where countries and institutions seek alternatives for reserves and transactions – is gaining traction. Central banks, especially in emerging markets, are diversifying their reserves, and the global conversation is shifting toward a more multipolar currency system. Recent data reflect this shift. The US Dollar Index (DXY) dropped to a nearly four-year low earlier this year.
While there have been brief recoveries, the overall trend has been gradual depreciation. The appointment of a new Fed chairman and legal uncertainties around US trade policy have added to the unpredictability. For investors, this means that while dollar-denominated assets may still offer resilience during periods of acute stress, a disciplined approach to hedging and diversification is increasingly important.
Energy shocks and currency realignment
The conflict in Iran has become a defining event for currency markets in 2026. The immediate result has been a sharp and sustained rise in energy prices, which has complicated growth and inflation forecasts. The market’s attention has shifted from fiscal and monetary policy to the impact of higher energy prices on different regions.
Net energy exporters – such as the US, Australia and Canada – have generally seen their currencies hold steady or strengthen, as their trade positions have improved. In contrast, net energy importers, including the euro area, the United Kingdom, Sweden and Japan, have faced renewed downward pressure on their currencies. For example, the euro weakened against the US dollar as the Dutch Title Transfer Facility (ttf) natural gas price surged by nearly 60% in response to the Iran war, echoing the euro’s reaction during the 2022 Ukraine conflict.
This divergence is also visible in central bank policy expectations. Swap markets have priced in possible rate hikes across many G10 central banks, reflecting the inflationary impact of higher energy costs. However, most central banks are taking a cautious, data-driven approach and remain sensitive to geopolitical developments. The Federal Reserve, European Central Bank and Bank of England have all indicated that any policy changes will depend on how inflation and global risks evolve.
Safe-haven flows have also shaped the landscape. The US dollar and Swiss franc have benefited from increased risk aversion, while the Japanese yen’s traditional safe-haven status has been tempered by domestic policy caution and Japan’s reliance on imported energy.
Discipline and diversification
Periods of heightened volatility and uncertainty can be overwhelming. Yet history shows that a disciplined, diversified and long-term approach to currency exposure is the most effective way to build portfolio resilience.
By focusing on underlying trends – such as the changing role of the US dollar, the impact of energy shocks, and the safe-haven value of precious metals – investors can navigate short-term turbulence with greater confidence. Maintaining a clear framework, regularly reviewing exposures and seeking prudent diversification will help keep portfolios robust, regardless of the headlines.
