The widening conflict in the West Asia has made one thing clear: At a time when investors are rushing for safety, the dollar is still the premier asset of choice.
As stocks swoon, and even gold and Treasuries — traditional havens — tumble as the US-Israeli war in Iran intensifies, the dollar’s rise stands out. Since the onset of the conflict over the weekend, the US currency is staging its biggest two-day rally in nearly a year.
“The dollar is behaving in a classic manner during these periods of risk aversion and uncertainty — and that is the safe haven king,” Paresh Upadhyaya, a strategist at Pioneer Investments, said. “This is escalating beyond just risk aversion and a flight to quality, to the market questioning the outlook for global growth and inflation.”
The demand for the dollar has served as a counterpoint to doubts that have cropped up about the greenback as the world’s preeminent reserve currency, stifling the “debasement” narrative that had cropped up amid President Donald Trump’s trade wars.
While a protracted conflict stands to sow further concern about US policy decisions and America’s status on the world stage, the fact is that at least for now, there is no better substitute for the dollar.
The Bloomberg Dollar Spot Index has rallied 1.3 per cent this week. Against that backdrop, nearly all 16 major currencies tracked by Bloomberg fell on Tuesday, with the euro sliding to its weakest level since November before paring the decline.
Options markets echoed the dollar’s spot moves: Traders now need to pay to hedge against a broad rally in the dollar, a sharp contrast to just a few days ago when options pricing showed them historically undecided on where the currency would move next. Risk reversals — a barometer of market positioning — indicated that traders are the most optimistic they’ve been on the dollar over a short horizon since 2024.
What Bloomberg Strategists Say
“The dollar remains the clearest beneficiary of the conflict in the Middle East, supported by both its safe-haven status and the US’s position as a net energy exporter, while most major currency counterparts are net importers. The dollar’s historical relationship with supply-driven oil shocks suggests there is still scope to extend its gains.”
-Skylar Montgomery Koning, MLIV Strategist.
The action in foreign exchange comes as global equities and Treasuries are falling. Declines in the US government debt market have sent yields surging as the widening conflict in the Middle East lifts energy prices, sparking fear that resurgent inflation will complicate the path for more Federal Reserve interest-rate cuts in the months ahead. Treasuries in the past have temporarily lost their haven appeal amid oil shocks.
“Investors need to think differently about the markets moving forward and protection because I don’t think bonds will protect as much as they has to have historically,” David Wagner, portfolio manager at Aptus Capital Advisors, said.
‘Rightful Place’
Stocks slumped in New York trade, with the S&P 500 Index finishing the session down 0.9%. Brent crude oil, meanwhile, spiked above $85 a barrel for the first time since July 2024 after Iraq cut output at the giant Rumaila oil field. Storage has been tightened because of export disruptions in the Strait of Hormuz, a key shipping route.
“Supply disruption out of the Middle East for oil and gas could have more negative consequences for Asia and Europe than the US, as we produce our own natural gas,” said Leah Traub, a portfolio manager at Lord Abbett & Co. “The dollar has taken back its rightful place as the safe haven currency.”
Measures of the so-called cross-currency basis — the extra cost investors pay or receive when sourcing dollars overseas instead of the US — have shown a surge in demand for the greenback relative to the Swiss franc, euro, pound and other major currency peers. The move signaled a broader appetite for dollar funding amid the spiraling conflict.
Unlike during recent oil disruptions emanating out of the Middle East, the US has grown more insulated from shocks after ramping up shale production in recent years. Once a major net importer of oil and gas, it’s now the biggest producer in the world and a key exporter — a dynamic that may help support the dollar at a time of rising oil prices.
Heading into the launch of US and Israeli strikes on Iran over the weekend, the market had largely been positioned for the dollar to drop. Traders held nearly $19 billion in wagers tied to a weaker greenback in the derivatives market, on par with peak levels seen last year, according to the latest data from Commodity Futures Trading Commission aggregated by Bloomberg through Feb. 24.
“The rally in the dollar is another stark reminder that understanding how the market is positioned is incredibly important,” said Bipan Rai, managing director at BMO Asset Management Inc. “For the past few months, the market had been net short dollars in the spot market due to increased hedging demand. We expect that theme is likely exhausted for now.”
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