A Dollar on the Rise
In the wake of Israel’s military strikes against Iran, the U.S. dollar has once again proven its power as a global safe haven. The ICE U.S. Dollar Index has climbed about 1% since the conflict intensified, a sharp turnaround from months of weakness. This is the dollar behaving “as it should,” according to financial analysts, rising during periods of fear and slipping back when tensions ease.
After losing ground steadily since February—dropping nearly 10% from its January high—this recent bounce suggests that the dollar’s downward spiral may be slowing. Though not all investors are convinced the rally will last, the return of the dollar’s traditional role during crisis moments is reassuring to markets.
Why War Sends Investors to the Dollar
During global crises, investors tend to flee riskier assets like stocks and commodities and move toward those considered safer, such as U.S. Treasurys and cash holdings in dollars. This process, known as a “flight to safety,” boosts demand for the dollar and U.S.-denominated assets.
The U.S. dollar is still the world’s primary reserve currency and is deeply embedded in international trade and finance. When uncertainty strikes—whether it’s war in the Middle East or tariffs disrupting global supply chains—investors gravitate toward what they believe is most stable. That’s often the greenback.
As a result, the demand for dollars increases, pushing up its value relative to other currencies. Even currencies traditionally seen as safe, like the Swiss franc and Japanese yen, lost ground this week to the dollar.
What’s Driving This Safe-Haven Status?
Several key factors contribute to the dollar’s continued dominance in turbulent times:
- Interest Rate Differentials: U.S. interest rates remain higher than in many other countries, which makes U.S. assets more attractive. While other central banks are cutting rates, the Federal Reserve is holding steady, supporting capital inflows into the U.S.
- Global Uncertainty: War, inflation fears, and trade disputes (especially involving U.S. tariffs) drive risk aversion. Investors looking to preserve capital prefer dollar-backed securities like U.S. bonds.
- Liquidity and Trust: The dollar market is the deepest and most liquid in the world. When panic hits, investors want to park their money where they know they can get it back out.
Optimists: This Is the Dollar Reasserting Itself
Supporters of the dollar’s recent rebound see it as a long-overdue correction. After months of weakness, driven in part by falling investor confidence in U.S. leadership and relentless government borrowing, the currency is regaining its traditional status.
“There’s a sense of relief,” wrote James Mackintosh in the Wall Street Journal, “that the dollar is finally behaving as it should.” Fund managers who had begun to abandon dollar holdings may now reconsider as the currency shows signs of stabilizing during global shocks.
MSCI analysts have modeled scenarios where geopolitical tensions, especially involving tariffs or war, actually strengthen the dollar even as they hurt global equities. In these models, a resilient U.S. economy paired with rising uncertainty abroad makes the dollar more attractive despite short-term inflation spikes or slower growth.
Pessimists: Don’t Be Fooled by a Temporary Bounce
Despite the rebound, many experts remain skeptical of the dollar’s long-term strength. Christophe Boucher of ABN Amro points out that global sentiment has turned sharply against the U.S. since Trump’s reelection. Bank of America surveys show that international fund managers are holding fewer dollars than at any point in the past two decades.
Analysts at Fidelity warn that the U.S.’s constant borrowing, twin deficits, and increasingly confrontational foreign policy could drive countries to slowly reduce their reliance on the dollar. “Something that was unbelievably exceptional,” says Talib Sheikh, “has become a little less exceptional.”
Even in scenarios where the dollar rises temporarily, it often brings pain elsewhere. A strong dollar can drag down global equity markets, increase the cost of foreign debt, and create ripple effects across emerging markets.
The war in the Middle East has reignited the dollar’s appeal as a safe-haven asset. But while conflict may provide temporary strength, the longer-term picture is clouded by domestic fiscal pressures and international distrust.
