The American dollar has regained some strength following last weekend’s military strikes against Iranian targets, but financial experts say the currency’s rise stems more from energy market shifts than investors seeking safety.
Since former President Donald Trump returned to office, the dollar had been weakening even during times of market uncertainty, largely due to questions about U.S. economic policies and ongoing domestic and international tensions.
Weakening the dollar after years of it being overvalued remains a cornerstone of the Trump administration’s economic strategy. However, the currency’s reduced role as a safe haven during global crises indicates that foreign investors, who already hold substantial U.S. assets, have altered their investment patterns.
The dollar’s broad gains following the extensive bombing operations by American and Israeli forces against Iranian facilities, including the killing of Supreme Leader Ali Khamenei and subsequent regional violence, came as a surprise to many observers.
The currency movement centered primarily on energy price changes rather than investors rushing to buy dollars for safety. Instead, it represented a shift away from currencies of nations most vulnerable to sustained high energy costs.
Since America now exports more petroleum and energy products than it imports, Monday’s initial 10% jump in global oil prices impacted other major currencies more severely due to concerns about economic damage if supply disruptions continue for weeks or months.
This explains why traditional safe-haven currencies like Japan’s yen failed to attract safety-seeking investors and instead fell more than 1% against the dollar Monday. Japan imports significant amounts of energy, with roughly one-third coming through the Strait of Hormuz.
China, another major oil consumer dependent on supplies now trapped in disputed waters, particularly heavily discounted Iranian crude that faces Western sanctions and current uncertainty, saw its recently strong yuan reverse course Monday, dropping 0.8% as events developed.
“This isn’t a friendly outcome for the Northern Asian currencies,” said Societe Generale currency strategist Kit Juckes, noting that Trump’s most significant signal so far indicates U.S. military action will continue for weeks rather than days.
Europe faces additional complications due to its natural gas dependence after shipping attacks effectively shut down the Hormuz route, which handles 20% of global liquefied natural gas shipments and up to 30% of crude oil.
European benchmark gas prices jumped nearly 50% at one point Monday, reaching their highest levels in over a year before closing up 35%, prompting the European Union’s gas supply group to call an emergency Wednesday meeting.
Last year, the United States provided 58% of the European Union’s LNG imports. Qatar, which supplied 6% of the bloc’s imports, halted production at its facilities Monday following Iranian attacks.
The euro declined 1% against the dollar, hitting its lowest point in more than a month.
Switzerland’s franc maintains its long-standing haven status, though this is complicated by the Swiss National Bank’s efforts to combat deflation and its renewed commitment to intervene by selling francs to limit the currency’s rise.
Regarding the broader economic impact of oil price spikes, Barclays economists estimate that each sustained $10 per barrel increase in crude prices reduces global growth by up to 0.2 percentage points. If predictions of oil exceeding $100 per barrel prove correct, the economic bite could be significant.
Currently, Monday’s net Brent crude price increase of $5 to $77 per barrel represents a more manageable impact, with movements so far having minimal demand effects on the United States itself.
Analysis now focuses on whether oil price pressure becomes an economic drag or inflation accelerator. With U.S. core inflation running above 3%, this could support maintaining high American interest rates throughout the year, providing additional dollar support.
As typical with Middle Eastern conflicts, initial economic impact assessments depend heavily on conflict duration and energy supply disruption length.
Trump has suggested the military campaign will run four to five weeks, and prediction markets like Polymarket show a 63% probability that Trump will end operations by month’s end.
Most currency reaction analysis doesn’t strictly involve dollar hoarding or cross-border safety seeking, but rather appears to reflect relative economic assessments based on energy exposure.
Nevertheless, this can create powerful, self-reinforcing effects.
Barclays’ general guideline suggests the dollar gains between 0.5% and 1.0% for every $10 oil price increase.
If dollar-denominated energy prices rise and remain elevated, pushing the exchange rate higher, this would both worsen the energy shock for overseas economies and drive the dollar even higher in a self-perpetuating cycle.
Nobody wants that scenario, especially Washington.
