Dollar’s Safe-Haven Status and Currency Market Oddities Amidst US-Israel-Iran Conflict
Since the start of the Israeli-American attacks on Iran on February 28, 2026, the dollar has experienced appreciation against major currencies, rising almost 2% on average against the euro, the yen and the pound sterling. This increase extends to a range of 1% to 3% against the currencies of several emerging economies, including the Mexican peso, Korean won, and Indian rupee.
The conflict has heightened risk aversion, prompting investors to seek the liquidity and safety of US Treasury bonds. But, the dollar’s response has been less pronounced than historically expected, leading to unusual behavior in currency markets.
The Role of Oil Prices
Analysts at ING emphasize that the primary transmission mechanism for geopolitical risk in this instance is the oil price. Typically, the dollar would exhibit a stronger response to energy price shocks. However, the dollar’s traditional correlations have weakened, with Francesco Pesole of ING noting that the key consideration for currency markets is “the depth and length of the Middle East escalation’s impact on oil prices.”
The Strait of Hormuz, a critical passage for Gulf oil, is effectively closed, exacerbating concerns about global energy supplies.
Dollar De-dollarization Trends
The dollar’s partial recovery is complicated by ongoing de-dollarization trends in currency markets and asset allocations. Bank of America’s weekly currency survey, preceding Israel’s attack, highlighted “de-dollarization still loading” and indicated that short USD positions were crowded but conviction in shorting the dollar remained strong.
On Friday, the dollar outperformed all currencies except the Swiss franc and the Japanese yen in early trade.
Financial Costs of the Conflict
As of March 19, 2026, the war on Iran had already cost the US $12.7 billion, and analysts at the Center for Strategic and International Studies (CSIS) estimate the cost is growing by roughly $500 million per day. By March 25, 2026, the total cost is likely to have exceeded $18 billion.
More than 3,000 people are believed to have been killed in Iran, and over 15,000 targets within the country have been struck in the first two weeks of the conflict.
Macroeconomic Implications
The US-Israel strikes against Iran have significant implications for the global economy and financial markets, and are considered existential for Iran’s leadership. Two primary scenarios are being considered: a base case of limited escalation and a contained energy price shock, and a global oil shock with prolonged closure of the Strait of Hormuz and broader macroeconomic consequences.
Wednesday’s CPI print had initially spurred hopes of earlier rate cuts from the Fed, softening the dollar, but the subsequent surge in energy prices has reversed this trend.