Dollar Returns to Play. Złoty Plummets as Investors Revise Forecasts

The Polish złoty is experiencing a sharp decline, with the dollar-złoty exchange rate approaching levels not seen in three months. This reversal comes as global economic factors shift, impacting currency markets. While the Middle East conflict, which previously bolstered the dollar, appears to be de-escalating, other forces are now driving currency valuations.

The dollar has gained approximately 15 groszy against the złoty since the end of last year, and about 25 groszy from its year-to-date low. Although the dollar has not yet reached its peak for the year, its strengthening trend is evident. The złoty is also weakening against the euro, albeit at a slower pace. The euro-złoty pair's volatility is naturally lower, but its recent behavior warrants attention.

Part of the explanation for the złoty's recent performance lies in the euro-dollar exchange rate. The euro has been declining against the dollar for two months, falling below its closing level for 2025 and approaching multi-month support levels. A break below this point could send the euro-dollar pair towards 1.12, a level that has previously capped euro strengthening in 2023-2024.

Despite apparent progress in US-Iran talks, the euro-dollar pair continued its southward trajectory this week. Analysts suggest that a fragile truce and Israeli actions in Lebanon are contributing to market nervousness. If markets lose confidence in stable oil prices, concerns about inflation and central bank actions could intensify. This comes as the European Central Bank unexpectedly raised interest rates in June, while the US Federal Reserve held steady. The market has significantly increased its estimates for future US interest rate hikes following the Fed's last meeting, contributing to the dollar's recent strength.

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The truce is fragile, and Israel's actions in Lebanon (which is not participating in the peace talks at all) do not help. If markets stop believing that oil prices can stabilize in the coming months, it will become nervous due to expectations regarding inflation and central bank actions.