The US dollar has recently found a respite, strengthening against all major currencies and reclaiming its status as a safe-haven asset during periods of market stress. However, analysts warn that this trend may be difficult to sustain.
In the first half of 2025, market confidence in US assets was shaken after Trump withdrew the "Liberation Day" tariffs announced in April, leading to the dollar's worst performance in over 50 years.
A Morgan Stanley research report noted that the US Dollar Index, which tracks the dollar against a basket of major currencies, fell nearly 10% in 2025, ending a 15-year bull market cycle.
However, the dollar's fortunes reversed following the outbreak of the Iran conflict. As a major crude oil exporter, the surge in WTI crude oil prices increased demand for the US dollar, since oil is priced in dollars. The US Dollar Index is currently near its highest level in 10 months.
At the same time, the dollar has demonstrated defensive characteristics while other traditional safe-haven currencies, such as the Japanese yen, have underperformed. Since the Middle East conflict began, the dollar has strengthened against the British pound, the euro, and the yen.
HSBC currency analysts wrote in a report last Thursday, "Geopolitical tensions in the Middle East have once again reinforced the US dollar's role as the primary safe-haven currency. This serves as a reminder that, contrary to popular belief a year ago, this function of the dollar has never truly changed."
European countries, heavily reliant on imports, have shown renewed vulnerability as the Middle East conflict triggered an energy price shock, leading to weakness in both the pound and the euro. In contrast, the United States has achieved self-sufficiency in crude oil production, making it more resilient to disruptions caused by Iran's potential closure of the Strait of Hormuz, a critical chokepoint for oil and gas transportation.
HSBC analysts added in the report that there are still reasons not to be fully optimistic about a strong dollar, especially since the drivers that fueled the dollar's rebound in 2022 are no longer present. Other analysts also suggest that the dollar's resurgence will be short-lived.
Russ Mould, Investment Director at AJ Bell, told CNBC, "The fundamental issues that caused the dollar's weakness before the Middle East conflict have not disappeared. These include elusive US government strategy, massive fiscal deficits, and political pressure on central bank independence. Frankly, investors typically associate these with emerging markets, not developed ones."
He added that although gold has not rallied significantly since the conflict began, the macroeconomic forces supporting gold prices remain, including rising Western government debt, particularly US profligacy on conflict spending. Gold prices have remained largely flat since the Iran conflict erupted on February 28.
Monday's trading showed the dollar supported by oil prices, though it retreated slightly from recent highs as Brent crude fell to $95 per barrel. A key question for investors is how long the conflict will last. Jason da Silva, Investment Director at private bank Arbuthnot Latham, told CNBC, "As long as the crisis persists, we expect the dollar to remain strong. But once the situation normalizes, we anticipate the dollar will resume its weakening trend. The dollar remains expensive, and in the long run, that is the true driver of its returns."
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