USD: Gains support as a safe haven amid rising conflict risks – MUFG

US Dollar Poised to Gain Amid Heightened Market Uncertainty

Derek Halpenny of MUFG observes that the US Dollar's brief dip following President Trump's decision to prolong the halt on strikes against Iran's energy infrastructure was short-lived, with the DXY index only marginally lower. He suggests that if risk aversion escalates—particularly with Brent crude oil trading at elevated levels and stock markets declining—the Dollar is likely to appreciate further in the near term, despite a less favorable outlook over the longer run.

Safe-Haven Demand Supports the Dollar

After President Trump announced an extension of the pause in military action against Iran's energy sector until 8pm EST on April 6th, Brent crude prices initially fell sharply. However, this decline was quickly reversed, reflecting investor skepticism about a positive resolution. The US Dollar's weakness in response to the news was also temporary, with the DXY index now just 0.1% below its pre-announcement level.

Halpenny notes that should global markets enter a more pronounced risk-off phase, marked by steeper declines in equities, the Dollar is expected to strengthen further. Earlier in January, concerns about the Dollar's reliability as a safe haven led to increased demand for gold and silver, while President Trump welcomed the Dollar's depreciation at that time.

Despite ongoing concerns about the Dollar's underlying fundamentals and expectations for it to weaken once Middle East tensions subside, Halpenny anticipates that, in the short term, the Dollar will likely benefit the most if equity markets experience sharper losses.

In a scenario where Brent crude trades between $120 and $160 per barrel and equity markets suffer greater losses, the DXY index could climb toward the 105 mark, representing a 7%–8% increase from levels before the conflict.

Halpenny also points out that in an environment of heightened risk aversion, factors such as trade balances and yield differentials are unlikely to significantly influence currency movements.

(This report was produced with assistance from an AI tool and subsequently reviewed by an editor.)