Dollar Surge May Be Short-Lived Amid U.S.-Iran Tensions, Analysts Warn
The U.S. dollar saw a short-term boost in global markets early Monday following military strikes by the U.S. on Iran, as investors turned to safe-haven assets amid rising geopolitical tensions. The dollar index rose by as much as 0.45%, indicating strength against multiple major currencies, including the euro, yen, and pound. This reaction mirrored traditional market behavior during crises, which also saw oil prices spike and equities dip. Analysts, however, caution that this dollar rally may not last.
Investment banks are increasingly predicting that the dollar’s strength is temporary and largely driven by fear rather than fundamentals. Several analysts note that the Middle East conflict is concealing underlying economic vulnerabilities such as the U.S.’s mounting fiscal deficits, unresolved trade disputes, and waning global demand for American assets. Notably, the dollar index has already declined more than 8% year-to-date, reflecting broader investor unease.
The potential closure of the Strait of Hormuz, a key oil supply route, remains a central concern. While the market fears full disruption, RBC Capital Markets analysts believe Iran may instead use asymmetric tactics to destabilize the region without fully shutting the waterway. Energy analysts also suggest that geopolitical players like China could pressure Iran to avoid actions that spike oil prices excessively.
Interestingly, the U.S. Treasury market, another traditional safe haven, did not react as strongly as expected, possibly reflecting deeper doubts about America’s fiscal trajectory. Analysts suggest concerns about increased Treasury issuance and ongoing tariffs may be tempering investor demand. Meanwhile, oil prices surged over 7% after Israel confirmed strikes on Iran, further exacerbating fears of a broader regional conflict.
Adding to economic pressure, the U.S. is also threatening hefty tariffs—up to 50%—on imports from the European Union ahead of a key July deadline, fueling trade war anxieties. Currency strategists from Macquarie and Bank of America highlight that the dollar’s current position is fragile and heavily reliant on geopolitical risk. If tensions ease, they say, the dollar could resume its downward trajectory, driven by economic fundamentals rather than fear.
Source: CNBC