The U.S. Dollar Index (DXY) held firm on Friday and was headed for its sharpest weekly gain in more than a year as intensifying hostilities in the Middle East pushed investors toward traditional safe-haven assets.
Demand for the greenback surged as the conflict between Israel and Iran widened into a broader regional confrontation, sending oil prices sharply higher and raising concerns about a fresh wave of global inflation. Currencies tied to economies dependent on imported energy — including the Euro and Japanese Yen — remained under pressure as investors recalibrated expectations for monetary policy across major central banks.
The dollar index, which tracks the greenback against a basket of major currencies, rose to around 99.14, putting it on course for a weekly gain of roughly 1.5% — the strongest since November 2024. The euro slipped about 0.16% to $1.159 and was set for its steepest weekly decline since September 2022, while the yen weakened to around 157.77 per dollar. British Pound Sterling also edged lower to roughly $1.3347.
The currency moves highlight how quickly global markets have been reshaped by the war’s economic fallout. What began as hopes for a contained confrontation has evolved into a wider regional escalation that is now threatening global energy supply chains and forcing traders to reassess the trajectory of interest rates worldwide.
Fresh uncertainty gripped markets after heavy military exchanges between the two sides. Israeli forces launched extensive air strikes on Hezbollah-controlled southern suburbs of Beirut and began what officials described as a “broad-scale” wave of attacks targeting infrastructure in Tehran. Iran responded by saying it had fired missiles at the heart of Tel Aviv.
Meanwhile, Donald Trump signaled a more aggressive posture from Washington. The U.S. president said he wanted a role in choosing Iran’s next head of state after joint U.S. and Israeli strikes killed Iran’s supreme leader, Ali Khamenei, during the early phase of the conflict. Trump also encouraged Iranian Kurdish groups based in Iraq to intensify pressure on Tehran, a move that analysts say risks widening the war even further.
Energy, The Major Concern
For financial markets, the dominant concern has become energy.
Iran has reportedly expanded its retaliation beyond direct military targets, striking or threatening oil infrastructure across the region. Energy installations linked to producers in Saudi Arabia and Qatar have been targeted, heightening fears that the conflict could severely disrupt supplies from the world’s most important oil-exporting region.
Those fears have already pushed crude prices sharply higher and injected fresh volatility into currency markets. Analysts say the extent of the energy shock will determine how long the dollar’s rally lasts.
Lee Hardman, senior currency analyst at MUFG, said the outlook for the greenback hinges largely on how severely energy prices surge.
“The key driver will ultimately be the scale of the energy price shock,” Hardman said. “If we were to see oil prices continue to jump higher and remain higher for longer, that would be the most supportive outcome for a stronger dollar.”
Conversely, he said, a cooling of the conflict that leads to a retreat in crude prices could quickly unwind some of the dollar’s gains.
The surge in oil has also begun reshaping expectations for global monetary policy. Higher energy costs typically feed directly into inflation, complicating efforts by central banks that had been preparing to ease interest rates after months of moderating price pressures.
Traders have already pushed back expectations for rate cuts by the Federal Reserve. According to the CME Group FedWatch tool, the probability of a June rate cut has dropped to roughly 34%.
Markets have also scaled back expectations for easing by the Bank of England, while money markets have even begun pricing in the possibility that the European Central Bank could raise rates again later this year if inflation surges due to energy costs.
Currency traders say the shift in the macroeconomic backdrop has been abrupt. Only weeks ago, many investors were preparing for synchronized monetary easing across major economies as inflation cooled. The sudden spike in oil has complicated that narrative and forced markets to reassess the global outlook.
Nathan Swami, head of FX trading for Japan, Asia North, and Australia at Citigroup in Singapore, said clients have broadly moved to cut exposure to riskier currencies.
“Broadly speaking, we are seeing most clients reduce risk across both G10 and EM currencies,” he said.
The shift reflects a wider retreat from risk assets. Equities and bonds have both come under pressure during the week’s volatile trading sessions. Even traditional safe-haven assets such as gold have experienced bouts of selling as investors raise cash and rotate toward the dollar.
Stability, When?
Energy security concerns are also intensifying debate over the effectiveness of Western military efforts to stabilize shipping routes and oil supply infrastructure. The U.S. Navy and allied forces have been considering expanded escort operations for tankers moving through the region’s key maritime corridors, particularly around the Strait of Hormuz, one of the world’s most critical oil transit chokepoints.
Yet many analysts doubt that naval protection alone will prevent the market disruption already unfolding.
Given how rapidly the conflict has escalated — and with Iran targeting energy infrastructure across multiple Gulf states — market participants say escort operations may do little to prevent an oil shock if the fighting continues to widen.
Oil facilities scattered across the Gulf remain difficult to fully protect from missile and drone attacks, and even temporary disruptions could send energy prices significantly higher. For major importing economies in Europe and Asia, that scenario would amplify inflation pressures just as central banks had hoped to begin loosening policy.
The resulting dynamic has strengthened the dollar’s appeal. Historically, the U.S. currency tends to rally during periods of geopolitical turmoil because of its status as the world’s primary reserve currency and the depth of American financial markets.
Investors will also be watching incoming U.S. economic data for clues about how resilient the American economy remains amid the turmoil. Markets are awaiting February’s employment report, which economists surveyed by Reuters expect to show that nonfarm payrolls increased by around 59,000 jobs after January’s gain of 130,000. The unemployment rate is forecast to hold steady at 4.3%.
Hardman said a stronger-than-expected jobs report could amplify the dollar’s rally by forcing markets to further dial back expectations for interest-rate cuts. A robust labor reading could trigger additional selling in global bond markets and push the dollar even higher as investors adjust to the prospect of tighter financial conditions.
Recent labor indicators have already suggested resilience. Data released Thursday showed the number of Americans filing new applications for unemployment benefits held steady last week, while layoffs declined sharply in February — signs that the job market remains relatively stable.
Beyond currencies, the geopolitical turmoil has also spilled into digital asset markets.
Bitcoin slipped about 0.96% to roughly $70,459, while Ether dropped about 1.21% to near $2,055 as investors trimmed exposure to volatile assets amid the uncertainty.
For now, currency strategists say the trajectory of the war, particularly its impact on global energy supply, will remain the dominant force shaping markets. If the conflict broadens further and oil infrastructure across the Gulf continues to come under attack, analysts warn that the world could be facing a new energy shock with wide-ranging consequences for inflation, interest rates, and the global financial system.
