By Rania Gule, Senior Market Analyst at XS.com – MENA
The US Dollar Index (DXY) is experiencing a clear upward wave, approaching the psychological level of 100, a signal closely linked to rising global demand for safe-haven assets. In my view, this increase reflects not only the inherent strength of the US currency but also reveals a deeper shift in investor behavior toward hedging in an environment marked by growing geopolitical uncertainty. When the index nears these sensitive levels, we are not discussing a short-term technical move but rather a global capital repositioning, especially amid declining confidence in the stability of supply chains and energy networks.
The geopolitical factor remains the main driver of this shift, particularly with Iran rejecting the US ceasefire plan and the continued closure of the Strait of Hormuz, posing a direct threat to one of the world’s most vital energy arteries. My analysis indicates that markets have not yet fully priced in a prolonged closure of the strait, especially as the likelihood of escalation rises. Tehran’s demands for compensation and sovereignty over the strait significantly raise the negotiation stakes, suggesting that the crisis is likely to persist. In this environment, the dollar emerges as the primary beneficiary, not only due to its economic strength but also because it is the most liquid and reliable safe haven during crises.
Meanwhile, Donald Trump’s decision to allow a 10-day window before any military escalation introduces an important tactical element to the markets. In my opinion, this move reflects an attempt to balance political pressure with maintaining global market stability, particularly in the energy sector. This window creates a short opportunity for diplomacy but also keeps investors on high alert, explaining the sharp volatility in risky assets. The temporary easing observed at the end of trading does not indicate a trend reversal; rather, it is a tactical pause within an upward trajectory for the dollar driven by fear.
On the monetary policy front, the Federal Reserve’s stance clearly reinforces this trend. Keeping interest rates relatively high while signaling only a single cut over the year reflects policymakers’ conviction that inflation, especially energy-related, remains a persistent threat. In my view, Jerome Powell’s comments on the “energy shock” are significant: the central bank recognizes that the geopolitical conflict could prolong inflation, justifying a continued tight monetary policy. This combination of high yields and global risks is the ideal formula to support the dollar at the expense of other currencies.
Economic data, such as the stability of jobless claims at 210,000, signal that the US economy remains resilient despite challenges. In my analysis, this resilience gives the Federal Reserve greater room for caution and boosts investor confidence that the US can absorb external shocks better than others. Consequently, the yield gap between the dollar and other major currencies, such as the euro and yen, will continue to support capital flows toward the United States.
From an energy market perspective, the ongoing closure of the Strait of Hormuz represents a dangerous turning point. My expectations indicate that any prolonged crisis will push oil prices far higher than currently priced, potentially reigniting a global inflationary wave. While this scenario is negative for global growth, it is positive for the dollar in the medium term, as it strengthens its safe-haven status and increases the likelihood of sustained high US interest rates. Conversely, Asian economies, which have already begun taking emergency measures, will be the most affected, potentially weakening their currencies.
With no impactful economic data on the daily agenda, markets become hostage to news and political statements. From my perspective, this increases volatility and makes traditional data-driven analysis less effective in the short term. The smart investor at this stage monitors geopolitical developments with the same rigor applied to economic indicators, as political factors have become the true market driver.
In summary, my view is that the overall trend still favors the dollar, with potential to test the 100 level and possibly surpass it if tensions persist. However, any sudden diplomatic breakthrough could trigger a sharp correction, especially given the large positioning of investors in dollar long positions. Therefore, I expect a phase of high volatility, but within an upward trend, where the decisive factor remains developments in the Middle East rather than traditional economic data.
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