By Daniela Hathorn, senior market analyst at Capital.com
While the military and political outlook surrounding the US–Iran conflict remains highly uncertain, financial markets are delivering a much clearer verdict, at least for now. In asset terms, America is emerging as the near-term beneficiary of the crisis, while much of the rest of the world is under pressure.
Before hostilities erupted, global positioning had leaned heavily toward non-US outperformance. Emerging markets, Europe and parts of Asia had been enjoying one of their strongest relative runs against US assets in years. That created fertile ground for a reversal once geopolitical risk surged. The outbreak of conflict has triggered exactly that, a rapid unwind of global risk positioning and a decisive rotation back into US assets.
The dollar reclaims safe-haven status
At the centre of this move is the US dollar. The Dollar Index (DXY) has staged a sharp rebound from its February lows near 95, breaking back above the 98.60 resistance zone and briefly testing 99.20, a level that had capped prior rallies. Technically, this marks an important shift in short-term momentum. The RSI has pushed higher into the 60 zone, reflecting strengthening bullish momentum without yet entering overbought territory. The previous breakdown in December and January appears to have formed a short-term base, and the recent breakout suggests the dollar is transitioning from a corrective phase into a renewed risk-driven advance.
This rebound is not purely technical. The dollar still functions as the world’s primary safe haven, and in moments of acute geopolitical uncertainty, capital flows toward US assets, particularly when positioning had been stretched against it.
Geography matters as well. The United States is physically insulated from Middle Eastern instability, protected by oceans and less directly exposed to regional spillovers than Europe or Asia. Meanwhile, the US has largely reduced its structural dependence on Middle Eastern oil, blunting the direct economic impact of supply disruptions relative to energy-importing economies.
US dollar index (DXY) daily chart:
Past performance is not a reliable indicator of future results.
Inflation risks and rates repricing:
That said, the dollar’s strength is not costless. Rising oil and commodity prices are feeding inflation concerns. Market-based expectations for US interest rates have shifted materially since the conflict began. Year-end fed funds pricing has moved higher, with investors now scaling back expectations of aggressive rate cuts. Treasury yields, which had been falling sharply prior to the escalation, have reversed higher.
This creates a feedback loop. Higher yields support the dollar, but they also tighten financial conditions, a development that could weigh on equities if sustained. As a result, the Federal Reserve’s policy outlook is becoming more complicated. A prolonged energy shock would reduce flexibility for rate cuts, particularly if headline inflation reaccelerates. That risk is now being priced into markets in real time.
Emerging markets bear the brunt:
If the US is the short-term winner in markets, emerging markets have been the clearest losers. Emerging market equities and currencies had been outperforming meaningfully before the conflict. The reversal has been swift and forceful. A stronger dollar historically pressures developing economies by tightening global liquidity and raising the cost of servicing dollar-denominated debt. The speed of the EM pullback underscores how vulnerable that positioning was to a dollar rebound. The pattern reflects a broader risk dynamic: dollar strength is often inversely correlated with emerging market performance. As long as geopolitical uncertainty persists, that headwind is likely to remain.
Importantly, this US outperformance is conditional. If the conflict drags on and morphs into a prolonged regional destabilisation, the inflationary consequences could become more severe, eventually weighing on US growth and risk appetite. In that scenario, the current advantage could erode.
Conversely, a swift and contained resolution could trigger a sharp relief rally in emerging markets and non-US equities, reversing some of the recent flows. For now, however, markets are clear: capital is seeking safety in the dollar and US assets. The technical breakout in DXY reinforces that shift. Until greater clarity emerges on the conflict’s trajectory, the combination of safe-haven flows, higher yields and positioning reversal is likely to keep the dollar supported and maintain pressure on the rest of the world.
