The US dollar is losing its crisis premium

The CEO of one of the world’s largest independent financial advisory and asset management organizations claims the US dollar is weakening despite geopolitical tensions and military uncertainty, signaling a deep change in the way the market views US assets.

devere group Nigel Green speaks as the dollar slipped against most major developed-market currencies on Tuesday following reports that US President Donald Trump is prepared to halt military operations against Iran even if the Strait of Hormuz remains largely restricted – a development that is causing renewed volatility in energy, bond and currency markets.

The movements in the foreign exchange markets are in sharp contrast to the first phase of the crisis.

At the peak of the surge, the US dollar index rose above 100, reaching its strongest level in nearly 10 months as investors turned to traditional safe-haven assets amid fears of prolonged conflict and severe energy disruptions.

Now, reactions to even temporary signs of easing tensions have varied considerably. The dollar is weakening even as the Strait of Hormuz, which normally carries about 20% of global oil flows, remains blocked.

One of the most important energy flashpoints in the world is still under pressure, yet the currency reaction has been much less defensive.

Nigel Green comments: “The dollar is no longer reacting to geopolitical tensions in the way the market was expecting.

“Even with a vital global energy artery severely disrupted, investors are retreating from the dollar at the first serious sign that the military surge may not accelerate further.”

Energy markets highlight the scale of disruption. Brent crude rose to a range of $116-$126 per barrel during the crisis, at one point gaining more than 50% in a short period.

Such a move reflects the severity of supply constraints and the sensitivity of global pricing to developments in the region.

At the same time, global bond markets have rallied. US Treasuries extended gains after comments from Federal Reserve Chairman Jerome Powell indicated that long-term inflation expectations remain stable, even as higher oil prices weigh on the macroeconomic outlook.

The combination of a soft dollar, strong bonds and higher oil prices marks a deviation from the dynamics of previous crises.

“Traditionally, geopolitical shocks of this magnitude have driven a sustained and broad-based rally in the US currency.

“In earlier periods of geopolitical tension, from the Gulf War to the early stages of the Ukraine conflict, the dollar consistently strengthened as global capital increasingly moved into US assets,” said the Deavere CEO.

“What we are seeing now is far more conditional. Demand for the greenback appears to be diminishing sharply, and this points to a shift in how investors are allocating capital under stress.”

The data supports this change in behavior. During an earlier surge in the current crisis, the dollar index rose by about 2-3% in a matter of weeks because of risks of prolonged market disruption and rising inflation.

Those gains are now being eroded, even though the underlying factors of uncertainty have not fully subsided.

Inflation remains a central concern. Higher energy prices have the potential to push US inflation back into the 4% range if supply constraints persist, yet currency markets are showing less inclination to treat the dollar as a primary hedge against that risk.

Nigel Green says: “Investors are increasingly separating short-term geopolitical headlines from long-term macro positioning.

“The idea that any kind of geopolitical tension automatically leads to continued dollar strength is being tested.”

Monetary policy expectations are also playing a role. Despite high oil prices, markets are leaning towards the possibility of a rate cut rather than further cuts, as policymakers remain confident that inflation expectations will remain under control.

At the same time, the structure of global energy markets has evolved.

The US is now a major energy producer and exporter, causing global oil flows to mechanically depress dollar demand in the same way they once did.

“Safe-haven demand is becoming more diverse,” says Nigel Green.

“Investors are allocating across currencies, commodities and fixed income rather than defaulting exclusively to the dollar as they perhaps once did.”

Its implications are wide-ranging. A more structurally balanced currency environment could support emerging markets, maintain commodity strength and reverse the direction of global capital flows.

The risks remain high.

The Strait of Hormuz remains under pressure, shipping flows are still disrupted, and the energy market reflects a delicate balance.

Deavere’s chief executive concluded: “The dollar’s behavior is giving a clear signal: long-established crisis patterns in global markets are beginning to develop.”