The U.S. dollar is back on top – for now

The U.S. dollar has enjoyed a reprieve in recent weeks, strengthening against all major currencies and once again regaining its place as a safe-haven asset in times of market stress. But analysts warn it will likely be short-lived. During the first half of 2025, the dollar posted its worst performance in over 50 years after U.S. President Donald Trump walked back his “liberation day” tariffs announced in April, rattling faith in U.S. assets. The dollar index, which tracks its performance against a basket of major currencies, fell almost 10% through 2025, ending a “15-year bull cycle,” Morgan Stanley said in an August research note. But its fortunes have turned since the Iran war began. The U.S. is a key exporter of oil, and the spike in the price of WTI crude has increased demand for its currency, as oil is priced in dollars. The index is now just below 10-month highs. The greenback has also exhibited defensive characteristics, while other traditional safe-haven currencies such as the Japanese yen have faltered. GBP= JPY=,EUR= 1M mountain The dollar has strengthened against sterling, euro and the yen since the Iran conflict. “Geopolitical tensions in the Middle East have once again reinforced the USD’s role as a primary safe-haven currency,” HSBC forex analysts wrote in a Thursday note. “It is a reminder of how this never really changed compared to the common narrative almost one year ago.” Both sterling and the euro have weakened as Europe once again showed vulnerability to energy price shocks caused by the war in the Middle East, as European countries rely heavily on imports. The U.S. has become self-sufficient in crude production and is more insulated from disruption to the Strait of Hormuz, the vital shipping route for oil and gas that Iran has closed. In their note, HSBC analysts added that there are reasons not to fully re-embrace a strong dollar, particularly as the drivers behind its rally in 2022 are no longer there. Other analysts, too, have said the dollar’s comeback will be short-lived. “The fundamental issues that contributed to its weakness before the latest war in the Middle East have not gone away,” Russ Mould, investment director at AJ Bell, told CNBC. “These include a capricious US administration whose strategy is hard to read, enormous fiscal deficits, and political pressure on central bank independence, all characteristics that investors would, frankly, expect of an emerging market rather than a developed one.” He added that though gold has yet to rally since the conflict began, the macro forces behind the yellow metal are still in place, including the rise in Western government debt, particularly as America “spends freely on its war effort”. XAU= 1M mountain The price of gold has stayed largely flat since the Iran conflict began on February 28. Monday’s trading indicates that the dollar is being supported by the oil price, easing slightly off its recent highs as Brent crude dropped to $95 per barrel. The key question for investors is how long the conflict will last. “As long as the crisis persists we would expect the dollar to be strong,” Jason da Silva, investment director at private bank Arbuthnot Latham, told CNBC. “But once the situation normalizes we expect the dollar to continue to weaken. The dollar remains expensive and we see this over the long run being the real driver of its long-term returns.”