Geopolitical tensions in the Middle East strengthen the US dollar

Geopolitical tensions and the escalation of the conflict in Iran over the weekend triggered an increase in energy prices and increased risk aversion among investors, which led to a noticeable strengthening of the US dollar. Analysts at the world's leading banks agree that in the short term, the US currency will remain the main beneficiary of the current situation.

Amid the worsening situation in the Middle East, financial markets reacted predictably: investors began to move away from risky assets, preferring reliable "safe havens." The main one is traditionally the US dollar. This trend is supported by a sharp rise in oil prices, which directly affects the global economy and exchange rates.

Direct link: oil and the dollar

Themistoklis Fiotakis, head of currency research at Barclays, has clearly outlined this relationship. "The escalation of the conflict in Iran over the weekend reinforced the dollar's support caused by rising energy prices — by 0.5–1% for every 10% increase in oil prices - and investors' unwillingness to take risks," he said.

This formula shows how sensitive the foreign exchange market is to fluctuations in the energy market. Rising oil prices not only increase the incomes of exporting countries, but also create inflationary pressures in importing countries, which forces investors to seek stability in the dollar.

Short-term gain for the US currency

David May, a strategist at HSBC, also confirms that the initial market reaction will be in favor of the US currency. "In the short term, the US dollar is likely to benefit," May said. He added that the current market reaction may differ from that observed during previous conflicts, for example, in June 2025, which indicates the uniqueness of each geopolitical situation.

The dollar's status as the world's main reserve currency and a key asset for safe investments makes it an obvious choice in times of global uncertainty.

Vulnerability of Asian currencies

While the dollar is strengthening, the currencies of countries heavily dependent on energy imports are under pressure. MUFG analyst Michael Wang identified the most vulnerable of them.

"We believe that currencies such as the South Korean won, the Indian rupee and, to some extent, the Philippine peso are more vulnerable given their dependence on oil imports, as well as the higher volatility of the South Korean won," Wang said.

For these countries, rising oil prices mean an increase in trade deficits and increased inflationary pressures, which negatively affect the exchange rates of their national currencies.

Conclusions

The current geopolitical tensions in the Middle East have once again confirmed the status of the US dollar as the main defensive asset. As long as uncertainty persists, investors will continue to seek refuge in the US currency. At the same time, the economies of developing Asian countries that depend on oil imports will face serious economic challenges, which will affect the stability of their currencies.