U.S. Dollar Strengthens as Middle East Conflict Drives Safe-Haven Demand
The U.S. dollar extended its gains on Thursday, recovering from a brief pullback from three-month highs as the escalating conflict in the Middle East pushed investors toward safe-haven assets.
Earlier optimism about a potential de-escalation faded quickly after Iran warned that the United States would “bitterly regret” the sinking of an Iranian warship near Sri Lanka. The conflict entered its sixth day, with intensified bombing and renewed threats from Iran to retaliate globally following the attack on the vessel.
Amid the growing geopolitical tensions, investors increased demand for the U.S. dollar, while other major currencies weakened. The euro fell 0.4% to $1.1579, while British pound sterling declined 0.3% to $1.3329.
Meanwhile, the U.S. Dollar Index (DXY) — which measures the greenback against a basket of six major currencies — rose 0.5% to 99.257.
Safe-Haven Demand Supports the Dollar
The recent strength of the dollar comes after months of debate about de-dollarization and whether the currency would continue to hold its traditional role as a global store of value.
Elisabeth Colleran, co-head of the emerging markets debt team at Loomis Sayles, noted that the recent market turbulence has once again highlighted the dollar’s safe-haven status.
According to Colleran, periods of heightened volatility and geopolitical risk tend to strengthen the dollar, while other major currencies — including the euro — come under pressure.
Investors Reassess Safe-Haven Assets
The renewed market turmoil has forced investors to reconsider which assets provide genuine protection during periods of crisis. Rising inflation concerns and geopolitical uncertainty have caused some traditional safe-haven assets to behave unpredictably.
Both German government bonds (Bunds) and U.S. Treasury bonds were sold during the latest market moves. As a result, benchmark yields climbed to 2.829% for German Bunds and 4.138% for U.S. Treasuries.
Despite the volatility, economic data released Thursday had little impact on currency markets.
U.S. Labor Market Remains Stable
Recent U.S. labor market data showed that the number of Americans filing new unemployment claims remained unchanged last week.
Initial claims for state unemployment benefits stayed at a seasonally adjusted 213,000 for the week ending February 28, slightly below economists’ expectations of 215,000 claims. The data suggests that the U.S. labor market remains relatively stable, with layoffs declining in February.
Dollar Liquidity Dominates During Market Stress
Analysts say that the current environment highlights the importance of dollar liquidity during periods of financial stress.
Bas van Geffen, senior macro strategist at Rabobank, noted that traditional safe havens such as gold have not performed as expected during the latest market turbulence. Instead, the sharp rise in the Dollar Index (DXY) suggests that investors are prioritizing access to U.S. dollar liquidity.
The dollar has climbed nearly 1.5% this week, putting it on track for its strongest weekly performance since November 2024. The currency has been one of the few assets to gain during a volatile period that has weighed on stocks, bonds, and even precious metals.
Inflation Concerns Complicate Central Bank Outlook
The surge in energy prices linked to the Middle East conflict has raised concerns about a potential resurgence of global inflation. Higher inflation could disrupt expectations for interest rate cuts by major central banks.
According to LSEG estimates, traders have pushed back expectations for the next Federal Reserve rate cut to September or October.
Market participants have also reduced expectations for the total size of U.S. interest rate cuts this year to about 40 basis points, down from 59 basis points before the conflict escalated.
Similarly, investors have scaled back expectations for Bank of England rate cuts, while money markets are increasingly pricing in the possibility of European Central Bank rate hikes later this year.
Thierry Wizman, global FX and rates strategist at Macquarie Group, said that central banks are increasingly concerned about the possibility that inflation pressures could return if energy supplies become constrained.
Currency and Crypto Markets React
In the broader currency market, the U.S. dollar rose 0.4% against the Japanese yen to 157.72 yen.
The dollar also gained 0.2% against the Chinese yuan, reaching 6.9058.
Earlier on Thursday, China announced its 2026 economic growth target of 4.5% to 5%, slightly lower than the 5% growth recorded last year. The adjustment suggests policymakers may take additional steps to address industrial overcapacity and economic rebalancing.
Meanwhile, cryptocurrency markets declined following strong gains in the previous trading session. Bitcoin dropped 1.5% to $72,236, while Ether fell 2.2% to $2,094.64.
