The US Dollar Recovers Amid Flight to Safety Following Israel’s Airstrikes on Iran

Geopolitical Shocks Reshape Currency Markets

In early June 2025, the US dollar staged a significant recovery after a period of sustained weakness, triggered by heightened geopolitical tensions following Israel’s airstrikes against Iranian targets. This escalation in the Middle East sent shockwaves through global markets, prompting investors to seek refuge in traditional safe-haven assets—most notably the US dollar. The episode underscores the dollar’s ongoing role as a global reserve currency and safe-haven asset amid geopolitical uncertainty and market volatility.

Key Market Data: Dollar Index and Currency Movements

The ICE US Dollar Index, which tracks the greenback’s value against a basket of major currencies, rose by approximately 0.42% on the morning of June 13, 2025, trading around 98.33. This followed a sharp drop to three-year lows the previous day, with the index bottoming out near levels last seen in March 2022.

The dollar’s rebound was accompanied by modest gains against other safe havens such as the Swiss franc and Japanese yen, which appreciated 0.1% and 0.4% respectively. Currency traders reacted quickly as uncertainty about the conflict’s escalation prompted portfolio reallocations toward assets perceived as stable.

Background: From Dollar Lows to Safe Haven Flight

Prior to the airstrikes, the dollar had been under significant downward pressure, influenced by market expectations of Federal Reserve rate cuts amid weakening economic data and political uncertainty. The dollar index had fallen sharply, and broad market sentiment favored risk assets, driving a substantial short position against the US currency.

However, the sudden military actions in the Middle East triggered a rapid reassessment. Investors abandoned some of their short-dollar bets, contributing to the greenback’s rebound. According to currency strategists at ING, news of regional strikes provided a catalyst for recovery in the dollar, which had been oversold and undervalued.

Political Statements and Regional Escalation

Israeli Prime Minister Benjamin Netanyahu described the operation as a “focused military campaign” targeting Iran’s nuclear and ballistic missile programs, warning that the campaign “will continue for as long as necessary to remove the threat.”

Iran responded by launching over 100 drones toward Israeli territory, with later ballistic missile launches confirmed by both Tehran and Israeli defense officials. Iran’s state news agency announced the start of a “severe retaliatory operation.”

US Senator Marco Rubio emphasized that the strikes were “unilateral” and carried out without American involvement, stressing that protecting US personnel in the region remains a top priority.

Safe Haven Status: Dollar’s Renewed Appeal

The dollar’s role as a safe haven was reaffirmed by its gains against the Swiss franc and Japanese yen, both traditional havens in times of uncertainty. Investors tend to flock to these currencies to protect capital during periods of increased market turbulence, seeking stability amid falling risk assets.

Currency analysts noted that although the dollar’s recovery was notable, correlations between the dollar and US equities had weakened recently. The drop in S&P 500 futures (-1.5%) limited further dollar gains, reflecting complex market dynamics.

Market Outlook: Continued Volatility and Monitoring

Strategists from ING highlighted that the duration and intensity of the Middle East conflict, along with its impact on oil prices, will remain critical factors influencing investor sentiment and the dollar’s trajectory.

They warned that current risks point to a prolonged period of tension rather than a short-term event, which could relieve some downward pressure on the dollar over time.

Broader Context: Dollar’s Struggle and Expectations

The dollar’s weakness earlier in June 2025 was driven by uncertainty in US monetary policy and expectations of imminent rate cuts by the Federal Reserve. These prospects weighed heavily on the currency, pushing it to multi-year lows.

A Bank of America survey published on June 13, 2025, indicated that despite the dollar’s sharp sell-off, many investors still maintained short positions on the currency, representing the most crowded trade.

The geopolitical escalation rebalanced risk perceptions, supporting renewed demand for the dollar as a safe asset, though other factors such as economic data and Fed policy decisions remain influential.

Investor Sentiment and Market Dynamics

While geopolitical tensions underpinned the flight to safety, the recovery was also attributed to technical factors such as short-covering and stop-loss triggers among traders.

Adam Turnquist from LPL Financial emphasized that the dollar’s bounce was supported by these market mechanisms as much as by fundamental risk aversion.

Conclusion: The Dollar’s Enduring Role Amid Uncertainty

The events of June 2025 reaffirm the US dollar’s status as a cornerstone of global finance, acting as a refuge amid escalating geopolitical risks. While the dollar experienced significant weakness leading into the crisis, the sudden surge in regional conflict spurred a rapid shift in market positioning.

Looking ahead, investors will closely watch developments in the Middle East, Fed policy signals, and economic data to gauge the dollar’s path. The interplay between geopolitical shocks and monetary policy will continue to shape currency markets in this volatile period.