Will the Middle East war push the US dollar index back to the 100 peak? Analysts dismiss the optimism: this rebound won't last long.

Due to the geopolitical tensions triggered by the Middle East conflict, the U.S. dollar has recently regained its upward momentum, but analysts generally believe that its rebound is fragile, as the structural issues that previously dragged the dollar down have not been fundamentally resolved.

As a major global oil exporter, the United States benefits from the surge in oil prices. Since crude oil is priced in dollars, rising oil prices directly boost demand for the dollar. Meanwhile, the Middle East conflict has reinforced the dollar’s safe-haven status. The U.S. Dollar Index has recently strengthened, surpassing the 100 mark and approaching its highest level in 10 months.

HSBC foreign exchange analysts noted in their latest report: “The renewed geopolitical tensions in the Middle East confirm the dollar’s primary safe-haven currency status. Compared to the market narrative nearly a year ago, this attribute has never truly changed.”

However, many analysts warn that the factors supporting the dollar’s short-term strength are unlikely to offset its long-term structural weaknesses. Rasmus Møldrup, Investment Director at AJ Bell, one of the UK’s largest investment platforms, told CNBC that the fundamental issues causing the dollar’s previous weakness still exist, including US policy uncertainty, ongoing fiscal deficits, and political pressures on central bank independence.

Oil Price Surge and Safe-Haven Demand Drive Dollar Rebound

Since the outbreak of the Middle East conflict on February 28, the global foreign exchange market landscape has undergone significant changes.

As a major oil exporter, the United States directly benefits from the surge in WTI crude oil prices—since oil is traded in dollars, rising prices directly increase demand for the dollar. At the same time, the dollar has reasserted its traditional safe-haven role, while other safe-haven currencies like the yen have underperformed.

European currencies have come under significant pressure in this round of conflict. Due to Europe’s heavy reliance on energy imports and high sensitivity to oil price fluctuations caused by the Middle East conflict, both the pound and euro have weakened. In contrast, the U.S. has achieved energy self-sufficiency and is better positioned to withstand disruptions to the Strait of Hormuz, a critical global oil and gas transit route.

Structural Risks Remain, Strong Dollar Unsustainable

Although recent performance driven by geopolitical tensions has been impressive, analysts remain cautious about the dollar’s outlook. HSBC analysts pointed out in their report that it is currently unwise to fully bet on a strong dollar, as the macro drivers that supported the dollar’s rise in 2022 no longer exist.

This short-term rebound comes after the dollar experienced a historic period of weakness. In the first half of 2025, following the Trump administration’s April announcement of “Liberation Day” tariffs and subsequent retreat, market confidence in US assets was severely shaken, and the dollar posted its worst performance in over 50 years. A Morgan Stanley report from August last year confirmed that the dollar index fell nearly 10% for the year, marking the end of a “15-year bull market cycle.”

Rasmus Møldrup attributes the current challenges facing the dollar to three structural pressures: the lack of policy coherence in the US government, ongoing fiscal deficits, and political interference in central bank independence. He bluntly states that these features, frankly, are more associated with emerging markets than developed economies.

Regarding the sustainability of this dollar rebound, most analysts believe it will depend on the evolution of the Middle East situation. Private bank Arbuthnot Latham’s investment director told CNBC: “As long as the crisis persists, the dollar is likely to remain strong; but once stability returns, downward pressure on the dollar will reemerge. Currently, the dollar’s valuation remains somewhat high, and in the long run, this is the key variable determining its long-term returns.”

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