The U.S. dollar rallied sharply on Friday after reaching a three-year low the previous day, as escalating military conflict between Israel and Iran pushed investors into safe-haven assets. The sudden surge in geopolitical tensions drove significant market volatility, with sharp moves in currencies, oil, gold, and global equities.
Safe-Haven Demand Lifts the Dollar
The dollar index, which measures the greenback against a basket of major currencies, rose 0.3% to 98.19. The dollar also gained 0.1% against the Swiss franc and 0.4% against the Japanese yen, two other traditional safe-haven assets. ING strategists noted that the Israeli strikes provided “the oversold and undervalued dollar a catalyst for a rebound,” though gains were capped by declines in U.S. stock futures.
Escalating Conflict Between Israel and Iran
Israeli Prime Minister Benjamin Netanyahu confirmed that Israel had launched a “targeted military operation” against Iran’s nuclear and missile infrastructure. In retaliation, Iran launched over 100 drones and ballistic missiles toward Israel, prompting Israeli defenses to intercept the incoming attacks. The strikes mark a significant escalation in the region’s long-standing tensions.
U.S. Stance and Global Political Response
U.S. Secretary of State Marco Rubio emphasized that the Israeli strike was conducted unilaterally, with no American involvement. However, U.S. officials later confirmed assisting Israel in intercepting Iranian missiles. President Donald Trump praised the Israeli operation and confirmed recent communications with Israeli leadership. Iran, meanwhile, accused the U.S. of complicity, stating the attacks could not have happened without U.S. support.
Oil and Gold Surge on Escalation Fears
The heightened risk of further conflict pushed crude oil prices higher. West Texas Intermediate crude climbed 7.2% to $72.96 per barrel, while Brent crude rose 7% to $74.21 per barrel. At one point, crude futures had surged as much as 13% before paring gains. Gold also benefited from safe-haven demand, with spot prices rising 1.4% to $3,431.09 and gold futures for August delivery up 1.5% to $3,452.70.
Market Volatility Spreads Across Asset Classes
European and U.S. stock markets declined on the news, while U.S. Treasury yields fluctuated throughout the day. Deutsche Bank strategists described the market reaction as a “strong risk-off move,” though some volatility eased by mid-morning London time. Rabobank economists called the market’s response “really quite restrained” given the scale of the geopolitical developments.
Broader Economic Implications
Before the strikes, the dollar had been under sustained pressure due to expectations of Federal Reserve interest rate cuts and growing short positions in the currency. Rising oil prices now add upward pressure to inflation expectations, which could reduce the likelihood of near-term Fed rate cuts and provide additional support for the dollar. Adam Turnquist of LPL Financial noted that the combination of rising geopolitical tensions and inflation risk has strengthened the dollar’s outlook.
Conclusion
The latest escalation between Israel and Iran has injected renewed volatility into global markets, driving investors back into safe-haven assets like the U.S. dollar, gold, and oil. With uncertainty over the conflict’s duration and potential spillover effects, markets are likely to remain highly sensitive to any further developments in the Middle East.