David McNamara: Dollar appeals as safe haven during Iran war
The dollar’s appeal as a safe haven during periods of heightened uncertainty has interlinked with the energy price shock arising from the Middle East conflict. In addition, the US economy’s relatively limited exposure to the Middle East and its position as a net oil exporter, compared to the Eurozone and UK who are net energy importers, has also worked in the dollar’s favour.
From a currency market perspective, the Middle East conflict has corresponded with a strengthening in the dollar. This represents a reversal of fortunes compared to how the greenback fared in the opening weeks of the year.
At that time, a combination of some disappointing US macro data, concerns over a government shutdown, fiscal risks, renewed trade tensions, dovish US rate expectations, as well as White House comments all weighed on the currency in early 2026. This saw EUR/USD trade briefly above the $1.20 mark to a high of $1.2078 in late January, while GBP/USD peaked at $1.3867.
The dollar’s ascent started to take shape over the course of February as markets positioned for a possible breakout of military action between the US and Iran (war commenced on February 28th). A distinctive feature of the dollar’s performance over this period has been its positive correlation to oil prices. As oil prices climbed, so too did the dollar. The trade-weighted dollar index rose by around 2.0%. Meanwhile, the currency appreciated by between 1.5–2.0% against several of the other majors, including the euro.
In level terms, this was reflected in EUR/USD trading to a low of $1.1412 in mid-March, as oil prices surged higher amid the escalation in the conflict. Similarly, the GBP/USD pair traded down to a trough of $1.316. Elsewhere, the combination of the stronger dollar and weaker yen prompted the Japanese authorities to intervene to support their currency after USD/JPY rose above the key ¥160 mark in late April.
The dollar’s appeal as a safe haven during periods of heightened uncertainty has interlinked with the energy price shock arising from the Middle East conflict. In addition, the US economy’s relatively limited exposure to the Middle East and its position as a net oil exporter, compared to the Eurozone and UK who are net energy importers, has also worked in the dollar’s favour.
Looking ahead, the outlook for the dollar will be heavily influenced by the evolution of the US-Iran war and, by extension, the trajectory of oil prices. Under a scenario, where the war remains unresolved and oil prices persistently elevated, the greenback is likely to retain the upper hand on the exchanges. However, if a deal to end the war is agreed – resulting in a sustained fall in oil prices - the dollar could lose momentum as the support from higher oil prices and safe haven demand starts to fade.
From a EUR/USD perspective, the recent price action highlights the importance of the $1.18 level as a key threshold. The pair has been unable to sustain a break above this level since the conflict commenced.
