Driven by geopolitical tensions stemming from Middle East conflicts, the U.S. dollar has recently regained strength, though analysts widely view the rebound as fragile, noting that underlying structural issues that previously weakened the dollar remain unresolved.
As a major global oil exporter, the U.S. benefits from surging oil prices. Since crude oil is priced in dollars, rising oil prices directly boost demand for the currency. At the same time, the Middle East conflict has reinforced the dollar's safe-haven appeal. The dollar index has climbed sharply in recent days, reclaiming the 100 level and approaching a 10-month high.
In a recent research report, HSBC foreign exchange analysts noted: "Renewed Middle East tensions reaffirm the dollar's status as the primary safe-haven currency. Compared to the market narrative from nearly a year ago, this attribute has never truly changed."
However, several analysts warn that factors supporting the dollar's short-term strength are unlikely to offset its long-term structural weaknesses. Russ Mould, investment director at AJ Bell, one of the UK’s largest investment platforms, told CNBC that the fundamental issues that previously weakened the dollar persist, including uncertainty in U.S. policy, widening fiscal deficits, and political pressure on central bank independence.
Surging oil prices and safe-haven demand have jointly driven the dollar's rebound.
Since the outbreak of conflict in the Middle East on February 28, the global foreign exchange market landscape has shifted significantly.
As a major oil exporter, the U.S. directly benefits from the surge in WTI oil prices—since oil is traded in dollars, higher oil prices directly increase demand for the currency. Meanwhile, the dollar has reasserted its traditional safe-haven role, while other safe-haven currencies like the Japanese yen have underperformed.
European currencies have borne the brunt of the conflict’s impact. Due to Europe’s heavy reliance on energy imports, the pound and euro have both weakened amid heightened sensitivity to oil price volatility triggered by Middle East tensions. In contrast, the U.S., which has achieved energy self-sufficiency, is better positioned to withstand risks of disruption to the Strait of Hormuz, a critical global oil and gas transit route.
Structural weaknesses remain, casting doubt on the dollar's sustained strength.
Despite its recent strong performance driven by geopolitical conflict, analysts remain cautious about the dollar's outlook. HSBC analysts noted in their report that it is not advisable to fully bet on dollar strength, primarily because the macroeconomic drivers that supported the dollar's rise in 2022 are no longer present.
This short-term rebound comes after the dollar recently experienced a historic period of weakness. In the first half of 2025, market confidence in U.S. assets was severely shaken after the Trump administration announced "Liberation Day" tariffs in April only to quickly backtrack, leading to the dollar's worst six-month performance in over 50 years. In a report last August, Morgan Stanley confirmed that the dollar index fell nearly 10% for the year, marking the official end of a "15-year bull market cycle."
AJ Bell’s Russ Mould attributed the current challenges facing the dollar to three structural pressures: a lack of policy coherence from the U.S. government, persistently widening fiscal deficits, and political interference undermining central bank independence. He stated plainly that these characteristics are "frankly, more often associated with emerging markets than developed economies."
Regarding the sustainability of the current dollar rebound, analysts generally believe it will depend on developments in the Middle East. An investment director at private bank Arbuthnot Latham told CNBC: "As long as the crisis persists, the dollar is likely to remain strong; but once the situation normalizes, downward pressure on the dollar will reemerge. Current dollar valuations remain in a relatively high range, and in the long run, this will be the core variable determining its returns."
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