13.06.2025 11:54

Following an Israeli attack on Iranian nuclear facilities, the US dollar experienced a broad-based strengthening this morning. This geopolitical event significantly impacted oil prices, which surged approximately 8% in response to the strike.

The increased oil prices are the primary driver behind the dollar's rise, though the current rally, at roughly 0.75% from overnight lows, is smaller than expected. Normally, such a geopolitical shock would also negatively impact equities and bonds, further bolstering the dollar. However, ING FX analyst Francesco Pesole points out that the dollar's usual correlations have recently weakened, and the approximately 1.5% drop in S&P 500 futures is currently limiting the dollar's gains. The decoupling of traditional market relationships is a notable feature of this situation.

The extent and duration of the Middle East escalation's effect on oil prices are now paramount for foreign exchange markets. Unlike previous Israel-Iran confrontations, this incident involves a direct attack on nuclear facilities. Although oil production hasn't yet been affected, the crucial role of Iran in global oil supply necessitates a substantial increase in the risk premium, according to market analysis from internet sources. A further escalation posing a threat to the Strait of Hormuz presents a critical risk; disrupting the flow of oil from the Persian Gulf, home to much of OPEC's spare capacity, would have significant consequences.

Uncertainty remains high, with Israel announcing further strikes and Iran already initiating retaliatory actions. Unlike previous, shorter-lived tensions, this situation points toward a prolonged period of instability, which could, counterintuitively, put downward pressure on the dollar. While the US might intervene by releasing oil reserves to mitigate excessive price spikes, the elevated risk premium attached to crude oil exacerbates inflationary concerns, particularly given the current economic climate.