Dollar surge could be short-lived after U.S. strike on Iran

CNBC

23-06-2025

The U.S. dollar surged in early trading on Monday, benefiting from its traditional safe-haven status after U.S. military strikes on Iran — but analysts are warning the gains may be short-lived.
The dollar index was up 0.45% at one point, indicating a gain against currencies such as the Japanese yen, the euro and the British pound, as well as the Canadian, Australian and New Zealand dollars. The greenback was last seen trading around 0.4% higher at 9.30 a.m. London time.
"The escalation of the Middle East crisis after the US attacks Iran during the weekend is expected to lead to some of the traditional safe haven effects in the market [such] as the oil price is rising, lower equity prices and a stronger dollar," said Kirstine Kundby-Nielsen, fixed income and currency research at Danske Bank.
Despite the initial rally, a growing consensus among investment banks suggests the dollar's strength may prove temporary.
Some analysts say the Middle East conflict is merely masking concerns over U.S. fiscal policy, trade wars, and weakening international demand for U.S. assets, which are likely to regain focus once the immediate crisis-driven demand fades. The dollar index is down more than 8% this year, reflecting the long-term concern.
The U.S. dollar's immediate strength is tied to fears of how Iran might retaliate, with a closure of the Strait of Hormuz — a waterway vital to the transit of oil — at the top of those concerns.
Yet, RBC Capital Markets analysts caution that the situation is more complex, noting that Iran has asymmetric capabilities to "strike individual tankers and key ports."
"Hence, we do not believe it is a 'full closure or nothing' scenario when it comes to the waterway, and Iran may deploy their asymmetric capabilities to raise the economic cost of the combined US/Israeli operations," said RBC's Halima Croft, a former CIA analyst, in a note to clients.
Jordan Rochester, head of FICC strategy for the EMEA region at Mizuho, also expressed some optimism when it came to the possibility of a Strait of Hormuz closure.
"It's a bold call but I doubt the strait of Hormuz is blocked and we avoid the $100-130pb oil levels touted by the sell side with Iranian allies such as China likely to be applying pressure to keep oil flows ongoing," he said in a Monday morning note. "The US is also likely to have made energy infrastructure a red line attached to its support of Israel."
However, a key indicator of safe-haven demand — the U.S. Treasury market — appears to be telling an entirely different story through its unusually muted reaction.
A global crisis typically sends investors flocking to U.S. government debt, but Danske Bank's Kundby-Nielsen said the "impact on US Treasuries is a bit more uncertain given the significant trade deficit and tariffs combined with a potential increase in the supply of Treasuries given the soft fiscal policy".
A global trade war is compounding these fiscal concerns.
With a July 9 deadline approaching until a reprieve on levies expires, the U.S. is threatening tariffs of up to 50% on most imports from the European Union.
"As far as the USD goes, we'd suspect that the USD would be sinking lower if it weren't for the War, largely because the news pertaining to US import tariffs is not particularly good, and because data from outside the US, while weak, does not point to further deterioration relative to the US," said Thierry Wizman and Gareth Berry, Macquarie's currency and rates strategists, in a June 20 note to clients that preceded the U.S. strike on Iran.
FX strategists from Bank of America also point out that investors are betting heavily on the decline of the U.S. dollar, which adds momentum to any downward move for the currency.
According to the BofA global fund manager survey released on June 16, fund managers currently see short-U.S. dollar as the third most crowded trade — although the survey was carried out before to the United States' involvement in the Middle East conflict.