US Dollar Forecast: DXY Rises as Crude Oil News Sparks Safe-Haven Rally

Dollar Index Rises as Safe-Haven Demand Surges on Israel-Iran Escalation

A sharp escalation in Middle East tensions triggered a robust safe-haven bid for the U.S. dollar Friday, reversing recent losses and lifting the Dollar Index (DXY) off multi-year lows. Israel’s airstrikes on Iran, which included targeted hits on nuclear and missile facilities, were met with a barrage of Iranian ballistic missile retaliation. The sudden flare-up injected fresh volatility into global markets, with traders scrambling for safety in the dollar, gold, and Treasuries.

Geopolitical Uncertainty Triggers Dollar Bid

The DXY rose 0.31% to 98.138, snapping a two-session losing streak. The greenback outpaced traditional safe-haven peers, gaining 0.3% versus the yen and 0.1% against the Swiss franc—an unusual reversal in typical safe-haven flows. This divergence highlights the dollar’s preeminence in high-stress geopolitical environments, particularly when global military threats escalate.

The rally was underpinned by Israeli Prime Minister Netanyahu’s confirmation of a “targeted military operation” against Iran’s strategic military infrastructure. Iran’s response, which included over 100 drones and subsequent ballistic missile strikes, has sparked fears of prolonged regional disruption, with oil infrastructure and shipping lanes in focus.

Oil and Gold Surge as Inflation Fears Grow

Crude futures soared over 8% to $73.76 per barrel, while gold hit $3,437.21 per ounce, reflecting heightened inflation risks. Analysts flagged that surging energy prices may complicate the Federal Reserve’s rate outlook. LPL Financial’s Adam Turnquist noted that higher oil prices introduce “upside risk to inflation,” reducing the probability of near-term rate cuts.

Yields on U.S. Treasuries climbed across the curve, with the 10-year reaching 4.411% and 2-year yields touching 3.954%, as bonds sold off on renewed inflation anxiety. The interplay between inflation expectations and Fed policy remains a key driver for DXY sentiment, especially with markets previously leaning toward a dovish Fed tilt.

Traders Eye Tariffs and U.S. Political Uncertainty

Despite the dollar’s safe-haven bounce, broader sentiment remains fragile. Ongoing concerns over U.S. trade policy and tariffs under the Trump administration have fueled dollar shorting, with Bank of America calling short USD the “most crowded trade” in their latest survey. This positioning may cap the upside potential unless geopolitical risks intensify further.

Outlook: Risk Events to Dominate Dollar Direction

The DXY’s rebound reflects renewed geopolitical risk appetite for the dollar, but sustained upside hinges on the duration of the Israel-Iran conflict and its impact on oil markets and Fed expectations.

If tensions persist, safe-haven flows and inflation-linked repricing of U.S. rates could reinforce dollar strength. However, underlying political risks and Fed uncertainty still pose headwinds.

Traders should expect reactive price action with limited directional conviction until the situation stabilizes.

More Information in our Economic Calendar.