Hormuz Strait Shipping Risks Push Up Safe-Haven Demand, Dollar Index Rises to 10-Month High But Faces Long-Term Downward Pressure

Reuters Finance App News — Recently, the global financial markets have been significantly affected by ongoing tensions in the Middle East, causing noticeable fluctuations in investor risk sentiment. As energy transportation security becomes a market focus, the US dollar has once again played its traditional safe-haven role. The US dollar index has strengthened markedly on safe-haven capital inflows, reaching a near ten-month high, indicating that global funds still prefer holding dollar assets during uncertain times.

One of the key market concerns is the shipping security of the Strait of Hormuz. Located at a critical point in Middle Eastern energy transportation, it is an important route for global oil supplies. Market estimates show that about 20% of the world’s seaborne crude oil needs to pass through the Strait of Hormuz. Therefore, any disruption to this route could quickly impact global energy markets, pushing up oil prices and triggering financial market volatility.

Amid recent market turbulence, international energy prices have also risen sharply. Brent crude oil prices have climbed back above $100 per barrel, reflecting concerns over supply risks. Rising energy prices not only influence global inflation expectations but also create ripple effects in currency markets. In this context, the US dollar often becomes one of the main safe-haven tools worldwide.

In the short term, the dollar’s strength is closely related to increased global demand for dollar financing. Because the dollar holds a central position in the global financial system, a large portion of international trade settlements, cross-border loans, and international bond issuances are dollar-denominated. When financial markets fluctuate, institutions often need to increase dollar liquidity to meet financing needs, which drives the dollar higher in the short term.

Additionally, the US dollar still plays a significant role in global foreign exchange reserves. Under market pressure, financial institutions and investors tend to increase their dollar holdings to ensure liquidity safety. Therefore, during periods of rising global risk sentiment, the dollar often receives strong support.

However, from a longer-term macro perspective, some institutions hold a more cautious view on the dollar’s future. Although current dollar strength is driven by safe-haven demand, from a cyclical standpoint, the dollar index may eventually return to a range of 96 to 100. The current level of the dollar is somewhat above the implied fair value based on interest rate differentials, suggesting limited upside potential.

Meanwhile, the long-term trend of the dollar is also influenced by structural factors. In recent years, the US fiscal deficit has continued to widen, and government debt levels have risen, sparking discussions about fiscal sustainability. When global investors evaluate long-term asset allocations, these factors may gradually impact confidence in dollar assets.

From a technical analysis perspective, the dollar index on the daily chart currently maintains a clear upward trend. Prices are consistently above key short-term moving averages and have formed a series of higher lows, indicating that bullish momentum remains dominant. Technically, the key resistance level is near 100.00. If the price breaks through this psychological barrier, the market could further test the 101.50 zone.

On the support side, a short-term key support level is around 98.50, corresponding to the recent consolidation lower boundary. If the dollar index falls below this level, prices may return to the support zone near 97.00.

Overall, the US dollar may continue to be supported in the short term by safe-haven capital inflows, but as markets gradually digest geopolitical risks, the future trend of the dollar index may revert to being driven by fundamentals.

Editor’s Summary

The current dollar trend is mainly influenced by two forces. On one hand, tensions in the Middle East and energy transportation risks boost safe-haven demand, providing short-term support for the dollar; on the other hand, from a long-term structural perspective, US fiscal conditions and policy uncertainties may exert ongoing pressure on the dollar.

In this context, the dollar may remain strong in the short term, but its medium- to long-term trajectory remains uncertain. Future market movements will depend on geopolitical developments, changes in global energy prices, and differences in monetary policies across countries. If risk sentiment eases gradually, the dollar could return to a more balanced volatility range.

FAQs

Q1: Why does the US dollar usually rise during global financial market turmoil?

The dollar holds a central position in the global financial system, so it tends to appreciate during market turbulence. First, as the world’s primary reserve currency, many central banks and financial institutions hold large dollar assets. When risks increase, investors often increase their dollar holdings to safeguard funds. Second, a large portion of international trade is settled in dollars. Companies engaged in global trade typically need to hold dollar reserves. During market volatility, they may preemptively increase dollar holdings, boosting demand. Additionally, many international loans and bond issuances are dollar-denominated. When financial institutions face liquidity pressures, they often need to increase dollar financing, further strengthening the dollar. Thus, during periods of rising risk sentiment, the dollar is often one of the most favored safe-haven assets.

Q2: Why is the Strait of Hormuz so important to the global energy market?

The Strait of Hormuz, located in the Middle East, connects the Persian Gulf and the Gulf of Oman. A large portion of crude oil from major Middle Eastern producers must pass through this route to reach Asian, European, and North American markets. Market estimates show that about 20% of the world’s seaborne crude oil transits through the Strait. Any disruption here could quickly reduce global energy supplies, pushing up oil prices. Historically, tensions in this region have caused significant volatility in energy markets. Investors often price in supply risks in advance, which is why oil prices tend to rise when geopolitical risks increase.

Q3: Why does rising oil prices tend to strengthen the dollar?

Rising oil prices do not directly push the dollar higher, but they are often associated with shifts in global risk sentiment. When oil prices increase due to supply risks or geopolitical tensions, markets tend to enter risk-averse mode. Investors may reduce risk assets and increase holdings in safe assets like the dollar. Because the dollar is the core currency in the global financial system, it becomes a key destination for capital inflows. Additionally, rising oil prices can boost inflation expectations, influencing central bank policies worldwide. If markets expect the US interest rates to stay high, the dollar is likely to be supported.

Q4: Why do some institutions hold a bearish view on the dollar’s long-term trend?

While the dollar often performs strongly in short-term market fluctuations, some institutions believe its long-term outlook faces challenges. A major reason is the continuous expansion of US fiscal deficits. Over the long term, rising government debt could undermine investor confidence in dollar assets. Moreover, the global economic structure is changing, with some countries promoting reduced reliance on the dollar—such as increasing the use of other currencies in trade and reserves. If this trend persists, it could gradually diminish the dollar’s dominance in the global financial system. However, such changes are typically long-term processes, and the dollar may still remain relatively strong in the near term.

Q5: What key factors should be monitored for future dollar index movements?

The future trend of the dollar index mainly depends on three factors. First, global risk sentiment: if geopolitical tensions persist or markets become volatile, safe-haven demand may continue to support the dollar. Second, US monetary policy: if the Federal Reserve maintains high interest rates while other major central banks cut rates, the interest rate differential could support the dollar. Third, US economic and fiscal conditions: if the US economy remains strong, the dollar may stay resilient; but if fiscal pressures worsen, long-term confidence could decline. Investors should consider macroeconomic data, policy changes, and global market environments comprehensively when analyzing the dollar’s future.

(Edited by: Wang Zhiqiang HF013)