U.S. dollar seen strengthening as U.S.-Israel strikes intensify

The U.S. dollar is likely to gain near-term support following the latest U.S. and Israeli military action against Iran, even as the broader currency reaction may remain uneven.

"The escalation in Iran over the weekend adds to recent dollar tailwinds via higher energy prices  - to the tune of 0.5-1% for every 10% increase in oil - and elevated risk aversion," Themistoklis Fiotakis, Head of FX Research at Barclays, said.

Washington and Tel Aviv have launched a fresh round of strikes that appears larger in scope than earlier operations, with Iranian leadership reportedly suffering significant losses, including Supreme Leader Ali Khamenei. President Donald Trump outlined sweeping war aims in a video message, signaling a campaign that could extend for days or weeks.

HSBC strategist David May said the greenback should initially benefit from the spike in geopolitical risk.

“The USD is likely to have an upper hand in the near-term,” May said, noting that the reaction could differ from the market’s behavior during the June 2025 Iran conflict.

At that time, the dollar’s safe-haven bounce faded quickly as domestic policy uncertainty weighed on sentiment. That episode prompted debate over whether the currency was losing its traditional defensive appeal.

“This would stand in contrast to its performance in June 2025 during the war with Iran,” May said. “Back then the USD’s knee-jerk strength proved to be very short-lived, as US policy uncertainty was a dominating feature that undermined the currency.”

May argued that the earlier pattern did not signal a structural erosion in the dollar’s haven status.

“This was not the case, in our view,” he said, adding that geopolitical shocks often produce mixed signals across foreign-exchange markets.

HSBC cautioned that the durability of any dollar strength will depend heavily on the broader macro backdrop and how risk sentiment evolves.

“Geopolitical events can give confusing signals for currencies, not just for the USD,” May concluded.