Middle East Tensions Persist: Will The US Dollar Emerge As The Biggest Winner?

The growing tensions in the Middle East have wreaked havoc in the international markets, as the prolonged war between Israel and Palestine has impacted the prices of major commodities such as oil while disrupting international trade. 

The U.S. dollar remained strong despite the market turmoil, as evidenced by the Dollar Index's 3.4% gain over the last three months. The mounting inflationary pressures amid rising oil prices have caused the greenback to reach its highest level in four and a half months on April 2. 

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Oil And The US Dollar

Oil prices have been rising amid the heightened tensions in the Middle East, as the tensions between Israel and Palestine continue to escalate. The Houthi attacks in the Red Sea region have also exacerbated volatility, as the water passage is a vital international trade route. 

“An escalation of the conflict is a major risk to commodity markets because the region has a substantial share of the global oil supply," the World Bank stated when the conflict first began in October last year, adding, "Historical precedents of military conflicts in the Middle East point to the possibility of significant disruptions in oil markets, with associated surges in prices."

Prolonged war between Ukraine and Russia has also added to the rising tensions, as Ukraine attacked one of the largest Russian oil refineries via a drone attack on April 2. 

The U.S. West Texas Intermediate contract for May delivery climbed $1.44, or 1.72%, on April 2, settling at $85.15 per barrel, marking the highest level since October 2023. Similarly, the Brent contract for June delivery saw an increase of $1.53, or 1.75%, reaching $88.94 per barrel. 

Iran, which is a member of the Organization of the Petroleum Exporting Countries (OPEC), accused Israel of instigating a broader region-wide conflict by launching an air strike in Syria. 

"The new week, the new month and the new quarter were greeted with escalating tension in the Middle East with indirect Iranian involvement," said Tamas Varga, an analyst at oil broker PVM, expecting that this conflict could result in a "region-wide conflict with plausible impact on oil supply."

Resilient Greenback 

The U.S. is one of the largest exporters of crude oil and assorted products, making the U.S. dollar highly susceptible to fluctuations in oil prices. However, a stronger dollar is typically associated with falling oil prices, as a strong dollar increases the cost of purchasing oil. The OPEC+ group is expected to stick to their production cut targets, especially amid concerns regarding a global economic slowdown. 

The U.S. dollar and oil prices have remained strong, as the rising tensions have boosted the demand for the world's reserve currency. 

While the delayed policy easing plans have allowed the dollar to remain strong so far this year, markets are increasingly pricing in rate cuts as early as June, which could allow the currency to lose steam. 

The increasing geopolitical risks amid "two hot wars" are expected to trump the downward pressure from rate cuts, according to Stefanie Holtze-Jen, Deutsche Bank Private Bank's chief investment officer. 

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