The Dollar rallies sharply, reclaiming its traditional safe-haven appeal.

The U.S. dollar extended its gains on Tuesday as escalating tensions in the Middle East reinforced the greenback’s traditional role as a global safe-haven asset.

At 04:25 ET (09:25 GMT), the Dollar Index (DXY), which measures the currency against six major peers, rose 0.8% to 99.080 — its highest level since January. The index had already advanced nearly 1% on Monday, marking its strongest daily performance in seven months.

Dollar supported by rising geopolitical tensions

Safe-haven demand continued to underpin the dollar as the conflict, initially centered between the U.S. and Iran, spread across the broader region.

Reports indicated missile strikes targeted the U.S. embassy in Riyadh, while Amazon data centers in the UAE and Bahrain were also hit as Iran launched retaliatory attacks throughout the Middle East.

The U.S. State Department confirmed it has ordered the evacuation of non-essential government personnel and family members from Bahrain, Iraq, and Jordan.

Meanwhile, Israel announced simultaneous military operations targeting Iran and Lebanon after the Tehran-backed Hezbollah group launched missiles and drones toward Tel Aviv.

Analysts at ING noted that the dollar strengthened broadly as investors reacted to surging energy prices. They added that in foreign exchange markets, the current environment highlights a divide between energy-independent economies and those heavily reliant on imports. In this context, the U.S. dollar appears well-positioned to benefit from the energy shock.

ING suggested the Dollar Index could remain supported in the near term, potentially targeting the 99.50–100.00 range as long as energy prices stay elevated.

The renewed safe-haven demand comes after months of skepticism about the dollar’s resilience during periods of stress, particularly after it failed to rally during last year’s tariff-driven global market downturn.

Euro pressured by energy exposure

In Europe, EUR/USD fell 0.5% to 1.1627, extending prior losses as the euro remained under pressure due to the region’s heavy dependence on imported energy.

ING noted that soaring natural gas prices have intensified downside pressure on the pair. While many expect the spike in gas prices to be temporary, sizable long positioning in the euro may discourage aggressive dip-buying unless clear signs of de-escalation emerge.

Investors are also awaiting the Eurozone’s flash February inflation data. Headline annual inflation is projected at 1.7%, unchanged from January, while core inflation — excluding food and energy — is expected at 2.2% year-on-year.

ING added that an upside surprise in inflation could lend modest support to the euro by making the European Central Bank more sensitive to energy-driven price pressures.

Elsewhere, GBP/USD declined 0.7% to 1.3314 as sterling remained weak. EUR/CHF slipped 0.2% to 0.9124 after the Swiss National Bank indicated a greater willingness to intervene in currency markets following the Swiss franc’s surge to a more-than-decade high against the euro.

Asian currencies struggle

In Asia, USD/JPY was little changed at 157.48 after climbing 0.8% overnight. Persistent uncertainty may prompt the Bank of Japan to adopt a more cautious policy stance, lowering expectations for a near-term rate hike.

Japan’s heavy reliance on imported energy also leaves the economy vulnerable to rising prices. Finance Minister Satsuki Katayama stated that currency market intervention remains an option to stabilize the yen.

ING noted that Japan’s energy-import dependence weakens the yen’s traditional safe-haven appeal, suggesting official intervention could become the primary support factor for the currency.

Elsewhere, USD/CNY rose 0.3% to 6.8994, recovering further from last week’s nearly three-year low, while AUD/USD fell 0.4% to 0.7060 as the risk-sensitive Australian dollar retreated.

Sources: Peter Nurse