Goldman Sachs links stronger dollar to reduced Treasury demand amid US-Iran conflict

Goldman Sachs observed an unusual market reaction in March 2026, where foreign institutions—particularly China and Japan—actively sold US Treasuries despite a 2% surge in the dollar, defying the usual flight-to-safety behavior during geopolitical crises. The US-Iran conflict escalated sharply, disrupting the Strait of Hormuz, which handles 20% of global oil consumption, triggering record oil price spikes and inflation concerns. Rising Treasury yields reflected fears of inflation over recession, while the dollar strengthened due to improved US terms-of-trade dynamics as a major energy producer. The bank identified China and Japan, the two largest foreign holders of US debt, as key sellers, contributing to higher borrowing costs across the US economy. Japan’s sales may stem from yen defense efforts, while China’s actions reflect broader US-China tensions and reserve diversification. Goldman Sachs lowered its 2026 US growth forecast and raised inflation projections, warning of stagflation risks and delaying expected Fed rate cuts to September or later, with a terminal rate between 3% and 3.25%. Equity markets reacted unevenly, with energy companies benefiting from higher oil prices but most others facing elevated input costs and weaker consumer demand. The traditional 60/40 portfolio strategy—relying on inverse stock-bond movements—faltered as both assets declined during the crisis. Goldman’s analysis suggests domestic institutions and the Fed may now underpin long-term Treasury yields, while the strong dollar tightens financial conditions without further rate hikes. However, a stronger dollar hurts US exports, pressures emerging-market borrowers with dollar debt, and weighs on corporate earnings. The bank noted that if China and Japan continue reducing Treasury exposure, market stability may depend on domestic buyers, including the Fed, to support yields even if geopolitical tensions ease.