The United States’ energy independence, compared to the energy dependence of Europe and Asia, means that the US is in an exceptionally strong position to remain resilient as the conflict continues.
There’s already a precedent for this long-term price movement. Following Russia’s invasion of Ukraine in 2022, an act that caused crude prices to exceed $100 per barrel for three months, the dollar entered a period of relative strength against the euro and yen.
The prospect of a prolonged war creating energy price squeezes and supply chain disruptions that increase inflation could also see the Federal Reserve take a cautious tone when it comes to interest rate cuts.
Given that high-interest-rate environments are generally positive for currency strength, we may see a market correction at a time when many investors have already priced in upcoming interest rate cuts by the Fed.
The third key factor focuses on how higher energy prices and the prospect of a stop to interest rate cuts could prospectively reverse portfolio flows into emerging markets, encouraging more investors to look closer to home in a dollar-supportive reversion.
What’s Next for USD?
For investors looking to the dollar as a strong long-term play, there are some factors to keep in mind.
“We can expect USD to show strength in the short term, but circumstances may be different in comparison to the Iran escalations in June 2025, which also saw the greenback embark on a price rally,” said Iván Marchena, Senior Economist at global brokerage brand Just2Trade.
“Last year, investors also flocked to the dollar as a safe haven option, but the bounce that USD experienced was short-lived as domestic policy uncertainty quickly spooked those holding the currency. This time around, the sustainability of the dollar’s rally will be down to clarity over the government’s stance on foreign policy and the Fed’s own thoughts on rate impacts.”
“For the dollar to avoid the short-lived resurgence of mid-2025, forex markets will be looking for decisiveness as well as clear indications on where the Federal Reserve is heading when it comes to holding rates.”
It can be challenging for a currency to hold on to its safe-haven status as a result of its involvement in an unexpected escalation in geopolitical tensions, but allowing investors the opportunity to formulate an idea of what’s to come next for the dollar could be crucial when looking further ahead.
Another issue that may become more problematic in the future is de-dollarization, which could be accelerated in the wake of the conflict in the Middle East. Today, technological solutions can support new financial structures that help to lower reliance on the greenback as the world’s reserve currency, opening the door to outflows.
Recently, the European Central Bank announced that it would be renewing its focus on repurchase agreements, paving the way for the lending of euros to other central banks in crisis scenarios. This could mean that global dollar usage falls during the conflict in a way that could see the value of USD decline.
Opportunities in Volatility
With plenty of variables in play, the future of the dollar appears to be positive, but with plenty of prospective complications looming for the currency.
Ultimately, US policy will have an integral say in the future direction of the greenback while the Federal Reserve’s prospective hawkish reversion may secure a stronger dollar for longer.
For forex investors, the short-term outlook for the currency will present plenty of opportunities through volatility. With the direction of the conflict in Iran and the wider Middle East still appearing far from certain, we could see plenty more price movements for USD.
