The US dollar has been whipsawed by the Iran conflict this week, surging on fresh escalation fears before retreating as peace hopes briefly resurfaced, leaving currency markets caught between geopolitical risk premiums and deeper questions about the greenback’s long-term trajectory.
Safe-Haven Swings
The US Dollar Index slipped toward 98.00 on Thursday and Friday after Israel and Iran signaled easing hostilities and President Donald Trump stated that the US-Iran ceasefire remains in place. But the reprieve was short-lived. US Central Command confirmed that Iranian forces launched missiles, drones, and small-boat assaults against three guided-missile destroyers — the USS Truxtun, USS Rafael Peralta, and USS Mason — while the vessels transited the Strait of Hormuz, describing the operation as unprovoked. The US military struck back at Iranian installations on Bandar Abbas and Qeshm Island. Barron’s reported that the dollar strengthened against a basket of currencies following the renewed hostilities, which also drove oil prices higher.
ING analyst Francesco Pesole wrote on May 8 that the dollar had rebounded as hopes for a swift US-Iran deal faded, with escalation risk acting as a near-term driver keeping the greenback bid. “The escalation risk is a key factor supporting the dollar’s recent recovery,” ING strategists noted, adding that if tensions ease, the currency could lose that support and resume a weaker trend. The Trump administration is awaiting Tehran’s response — expected through Pakistan within two days — to a proposal to reopen the Strait of Hormuz and end the nearly ten-week conflict.
Structural Ceiling
Even as geopolitics buoy the dollar in the short term, analysts at Brown Brothers Harriman cautioned on May 8 that persistent structural headwinds cap any sustained rally. BBH pointed to chronic US fiscal deficits, the evolving role of the dollar in global reserves, and narrowing interest rate differentials as other major central banks tighten policy. While stronger-than-expected jobs data and resilient consumer spending have provided a tactical floor, BBH argued those cyclical boosts are “insufficient to reverse the broader structural trend”. The firm expects the DXY to remain anchored within its roughly 96.00–100.00 range.
Ripple Effects Across Currencies
The tug of war has rippled through other currency markets. The Canadian dollar gained ground as easing safe-haven demand weighed on the greenback earlier in the week, with USD/CAD falling to around 1.3600. Reuters reported on May 7 that fresh optimism over a possible end to the Iran war had pushed the US dollar back to pre-conflict lows, lifting risk appetite across emerging markets. Latin American equities and currencies have been among the chief beneficiaries of dollar weakness in 2026, with Brazil’s Ibovespa up more than 23% year-to-date and the Brazilian real appreciating roughly 9% against the dollar. Colombia and Argentina have also posted double-digit equity gains as capital rotates toward commodity-rich emerging markets.
With Tehran’s response to the Hormuz proposal imminent, traders are watching three indicators in tandem: shipping through the strait, crude oil prices, and Federal Reserve rate expectations. If all three cool simultaneously, the dollar is likely to give back more of its conflict-era gains. If oil stress persists, the greenback’s safe-haven bid may endure — even as the structural headwinds BBH flagged continue to weigh on the longer horizon.
