The Iran war allows the US dollar to regain its crown, but is the strength likely to be short-lived?

In recent weeks, the US dollar has experienced a period of relief, strengthening against all major currencies and once again regaining its status as a safe-haven asset during times of market stress. However, analysts warn that this performance is likely to be short-lived.

In the first half of 2025, after US President Trump withdrew the “Liberation Day” tariff measures announced in April, market confidence in US assets was shaken, and the dollar recorded its worst first-half performance in more than 50 years.

The US Dollar Index, which measures the dollar against a basket of major currencies, has fallen nearly 10% in 2025. In an August research report, Morgan Stanley stated that this marks the end of the dollar’s “15-year bull cycle.”

However, since the outbreak of war in Iran, the dollar's trend has reversed. The US is a major oil exporter, and the surge in WTI crude prices has boosted demand for dollars, as oil is priced in dollars. Currently, the Dollar Index is approaching a 10-month high.

Meanwhile, the dollar has reasserted its defensive characteristics, while other traditional safe-haven currencies, such as the yen, have weakened. Since the outbreak of the Iran conflict, the dollar has appreciated against the pound, the euro, and the yen.

HSBC Bank foreign exchange analysts wrote in a report on Thursday: “The heightened geopolitical tensions in the Middle East have once again reinforced the dollar’s role as the main safe-haven currency.”

They pointed out: “This is a reminder that, despite the widespread view in the market about a year ago, this has never really changed.”

Both the pound and the euro have weakened, as Europe is once again exposed to the vulnerability of energy prices driven by the Middle East war. European countries are highly dependent on energy imports, whereas the US has now largely achieved self-sufficiency in crude oil production, making it more resilient to disruptions from the potential closure of Iran’s key oil and gas shipping route, the Strait of Hormuz.

However, HSBC analysts also added that the market does not have sufficient reason to fully embrace a strong dollar again, especially as the factors that drove the dollar’s surge in 2022 are now absent.

Other analysts also believe that this dollar rebound is unlikely to last.

AJ Bell Investment Director Russ Mould told CNBC: “The fundamental issues that caused the dollar to weaken before the latest war in the Middle East have not disappeared.”

He pointed out that these issues include: “A US government with inconsistent policies and unclear strategy; massive fiscal deficits; and political pressure on central bank independence—in all honesty, these features resemble investors’ impressions of an emerging market country more than those of a developed economy.”

He also noted that, although gold has not seen a significant rise since the conflict broke out, the macroeconomic logic supporting gold remains, including the continued climb of Western government debt, especially against the backdrop of the US “lavishly spending on war efforts.”

Since the outbreak of the Iran conflict on February 28, gold prices have largely remained stable.

Monday’s market performance showed that the dollar is still mainly supported by oil prices. As Brent crude retreated to $95 per barrel, the dollar also slightly pulled back from recent highs. The key question for investors is how long this conflict will last.

Jason da Silva, Investment Director at private bank Arbuthnot Latham, told CNBC: “As long as this crisis continues, we expect the dollar to remain strong. But once the situation returns to normal, we expect the dollar to resume its weakening trend. The dollar is still overvalued at present, and in the long term, that is the real driver of its returns.”