Dollar Rises 0.9% as Geopolitical Tensions Surge Oil 11%

Following the U.S. airstrike on Iran, investors have sought to mitigate geopolitical risks, driving the dollar higher in early Asian trading. On Monday, the dollar rose slightly against the euro and most major currencies. Oil futures surged, while U.S. stock index futures fell due to risk aversion and concerns over energy supply. Treasury futures remained largely unchanged.

One early sign of risk aversion was the drop in Bitcoin below 100,000 for the first time since May, with Ethereum also experiencing significant declines, leading to a broad sell-off in the cryptocurrency market.

Since the beginning of the month, when Israel first struck Iran, market reactions have been relatively muted. Despite a two-week decline, the S&P 500 index is only about 3% below its February high. The Bloomberg Dollar Index has risen less than 1% since the June 13 attack. This is largely because investors expect the conflict to remain localized and not have broader economic impacts. However, market observers note that if Iran responds by blocking the Strait of Hormuz or attacking U.S. military assets in the region, market volatility could increase.

“Everything depends on how the conflict develops, and the situation seems to be changing every hour,” said a senior investment manager. “The market will only take it seriously when the Strait of Hormuz is blocked, as this will affect oil supply.”

Iran has vowed to retaliate against the airstrike with “permanent revenge” and has reserved all options to defend its sovereignty. Meanwhile, Israel continues to launch strikes targeting military facilities in Tehran and western Iran.

“This marks a turning point for the market,” said a chief investment strategist. “The question is whether U.S. assets will still enjoy a risk premium.”

However, the downside may be limited as some market participants have already prepared for an escalation in the conflict. Since Israel's attack on Iran on June 13, the MSCI Global Index has corrected by 1.5%. Fund managers have reduced their stock holdings, and stocks are no longer overbought, with increased hedging demand, making deep sell-offs at these levels less likely.

The most notable market reaction to the escalation has been in the oil market, with Brent crude oil futures surging 11% to 77 dollars per barrel. Traders are bracing for another surge in oil prices, although the outcome of the crisis remains unclear. Following the U.S. airstrike, which significantly increased risks in a region that produces a third of the world's oil, oil prices are expected to continue rising on Monday.

Analysts at Morgan Stanley noted that if the conflict is resolved quickly, oil prices could fall back to the 60 dollar range, but continued tension could keep prices at current levels. “If oil transportation in the region is disrupted, leading to a fundamental change in global supply, oil prices will rise sharply from current levels,” they said. Other analysts warned that sustained oil price increases could trigger a short squeeze in the dollar, despite the fundamentals “still suggesting that the dollar's strength will fade.”

Since the start of the conflict, the dollar has risen by about 0.9%, but given the dollar's traditional role as a safe-haven currency, this increase is relatively modest. In recent months, President Trump's trade and fiscal policies have weighed on the dollar's performance.

“The biggest trade right now is shorting the dollar,” said a chief investment officer. “No one likes the dollar. But traditionally, it is the currency people turn to for safety, and this could reverse the dollar's fortunes.”

In the 29 trillion dollar U.S. Treasury market, the reaction since the start of the conflict has been more complex. Yields initially fell but quickly reversed course due to concerns about inflation. Overall, U.S. Treasuries have seen little change since June 13, with the 10-year yield rising by less than two basis points, closing at 4.38% on Friday.