Key Highlights 

  • DXY is just below 10-month highs after recovering sharply since the Iran conflict began on February 28 
  • The dollar fell almost 10% through 2025, its worst annual performance in over 50 years, ending a 15-year bull cycle 
  • Oil's spike above $100 is the primary catalyst; WTI crude priced in dollars is driving direct demand for the greenback 
  • Gold has stayed largely flat since the conflict began, even as Brent crude eases back toward $95 
  • Market observers broadly warn the recovery will be short-lived once the crisis normalises 

A Reprieve, Not a Renaissance 

The dollar is back. After its worst year in over 50 years, the greenback has strengthened against every major currency in recent weeks, reclaiming its identity as the world's premier safe-haven asset. The Dollar Index is trading just below 10-month highs, a remarkable turnaround from a currency that spent much of 2025 in freefall. 

But experts are not popping champagne. The dollar has been handed a lifeline by the Iran conflict, not a fundamental rehabilitation, and there is a growing consensus that when the crisis passes, the weakness will return. 

 

What 2025 Did to the Dollar 

The dollar posted its worst performance in over 50 years in 2025, with the Dollar Index falling almost 10%. Morgan Stanley, in an August 2025 research note, declared it the end of a "15-year bull cycle."  

The trigger was President Trump's "liberation day" tariff announcements in April 2025 and the chaotic walkback that followed, which rattled faith in US assets broadly and raised uncomfortable questions about US economic policy that have not gone away. 

 

The Iran War Changes the Calculus 

The dollar's fortunes turned when the Iran conflict began on February 28. Two mechanisms are at work. 

First, oil. The US is now a major exporter of crude, and the spike in WTI crude prices has increased global demand for dollars, as oil is priced in the currency. Brent has since eased back toward $95 per barrel, and the dollar has softened modestly in line, a relationship worth watching closely. 

Second, safe-haven flows. The dollar has strengthened against sterling, the euro, and the yen, with the Japanese yen, traditionally a rival safe-haven, notably faltering. Geopolitical crises of this nature have historically reinforced the dollar's role as the world's primary safe-haven currency, and this episode is proving no different. If anything, the speed and scale of the move is a reminder that the dollar's defensive status never really faded, despite the narrative of structural decline that dominated markets through much of 2025. 

Europe's Vulnerability Is the Dollar's Gain 

Sterling and the euro have weakened because European countries remain heavily dependent on energy imports, making them acutely vulnerable to oil price shocks from Middle East instability. The US, by contrast, has become self-sufficient in crude production and is more insulated from disruption to the Strait of Hormuz, the vital shipping route that Iran has closed. This energy asymmetry surfaced in 2022 during the Russia-Ukraine war and is surfacing again now. 

 

The Structural Problems Have Not Gone Away 

The structural weaknesses that drove the dollar's 2025 decline remain firmly in place. Policy unpredictability from the US administration, widening fiscal deficits, and growing pressure on central bank independence continue to undermine long-term confidence in the currency. These are characteristics more commonly associated with emerging markets than with the world's reserve currency issuer. The drivers behind the dollar's 2022 rally, aggressive Fed rate hikes and wide yield differentials, are no longer present. 

Gold, notably, has stayed flat since the conflict began. The macro forces behind it, rising Western government debt and central bank diversification, remain intact. If gold starts to move, it may signal investors rotating away from the dollar rather than toward it. 

 

The Outlook: Tied to the Conflict 

The prevailing view among market observers is that the dollar's strength is real but conditional. As long as the conflict continues and oil stays elevated, the currency has firm support. But once the situation normalises, the dollar is widely expected to resume its longer-term weakening trend. At current levels it remains expensive by historical measures, and that valuation gap is seen as the real constraint on sustained appreciation over the long run. 

Watch two things: oil and the conflict. Brent at $95 and slipping is already pulling the dollar off its highs. A move below $90 removes a key support. Any credible de-escalation would unwind the crisis premium quickly, returning the dollar to the structural questions it faced before February 28. 

 

For Now 

The dollar is back on top for good reason. A geopolitical shock, surging oil, and Europe's energy vulnerability have handed it a moment of genuine strength. But it is borrowed time. The dollar is not back because the US fiscal position has improved or the administration has become more predictable. It is back because there is a war and oil is expensive. When the war ends, the reprieve ends with it. 

 

Frequently Asked Questions 

  1. Why is the dollar rising despite its weak 2025?  

The Iran conflict triggered safe-haven demand for dollars, while the oil price spike boosted the currency through commodity trade flows. Both effects are crisis-driven rather than structural. 

  1. Why have the euro and sterling fallen?  

Europe's heavy dependence on imported energy makes it a structural loser when Middle East conflict sends oil prices higher. The US, now energy self-sufficient, benefits from the same dynamic. 

  1. Why has gold not rallied? 

 Gold has stayed largely flat since February 28 despite the conflict. The macro forces behind gold, rising debt and diversification trends, remain intact but have not yet triggered a move. A sustained gold rally would signal weakening confidence in the dollar as the primary safe-haven. 

  1. Will the dollar's strength last?  

The broad consensus among market observers is no. Once the conflict normalises, structural headwinds including fiscal deficits and policy unpredictability are expected to reassert themselves. 

  1. What are the key levels to watch?  

Brent crude at $90 is the oil line to monitor; a sustained break below there reduces dollar support. On the DXY, 99.0 is the immediate downside level; a break there would confirm the reprieve is fading faster than expected.