The dollar has surrendered most of its war-related gains as traders abandon bullish bets on the currency. Hope for a US-Iran nuclear deal has eroded the dollar's safe-haven appeal, pushing it down 2.3% from its late March peak against a basket of peers. The currency is on track for its worst month since August, with the euro recovering almost all losses from the conflict's first weeks.

Emerging market currencies have led the recovery, with the South Korean won and South African rand up more than 2% this month. "It's a de-escalation trade," said Meera Chandan, co-head of global FX strategy at JPMorgan, which has revived short-dollar recommendations favouring currencies including the Australian dollar. The South African rand and won were among the hardest hit at the conflict's start.

Investors are now pricing in the possibility of a Fed rate cut this year, while expecting rate rises in Europe. That policy divergence has dragged the dollar lower against every major currency except the Japanese yen in April. Wall Street banks expect the euro to rise to $1.20 next year from around $1.175 currently. "The bigger-picture, secular forces will ultimately pressure the dollar weaker," said Roger Hallam at Vanguard.