Is the other storm behind oil prices breaking 100: the dollar breaking 100?

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Source: Cailian Press

Cailian Press, March 19 — (Editor: Xiao Xiang) As international oil prices and the US dollar index both “break 100” in the past week, this rare Middle East conflict triggered by the US and Israel’s attack on Iran means investors face not only higher oil prices but also a stronger dollar than many expected at the beginning of the year…

Market data shows that since February 28, when the US and Israel’s strike on Iran sparked regional conflict and nearly cut off nearly one-fifth of global oil supply through the Strait of Hormuz, the dollar has become one of the clearest “safe haven” winners.

The dollar’s performance has overshadowed all other safe haven currencies, including the Swiss franc and Japanese yen, and has outperformed traditional safe assets like bonds and gold by a significant margin. Suddenly, the consensus of a bearish dollar by 2026 seems outdated.

Meanwhile, the unexpected strength of the dollar could have far-reaching ripple effects, impacting global trade, growth, and markets. All else being equal, a renewed dollar rally would tighten financial conditions, erode US corporate profits, and drag down global trade. Emerging economies with large dollar-denominated debts will be hit hardest.

Why has the dollar become a market winner?

The current safe haven appeal of the dollar seems logical in terms of market reasoning. The US energy sector is relatively self-sufficient, so it is less vulnerable to gasoline price surges compared to other countries.

Of course, with US crude oil prices surpassing $90 per barrel, the US is not completely unaffected. But in the forex market, the more critical factor is the comparison between currencies.

In fact, although both are safe haven currencies, the Japanese yen is in a much worse position than the dollar, as nearly all of Japan’s energy is imported. This weakens the yen’s attractiveness during this crisis; at the same time, another safe haven currency, the Swiss franc, faces downside risks — the Swiss National Bank has warned it will intervene to limit excessive franc appreciation.

On the other hand, since the Middle East conflict erupted, US stocks and bonds have also declined but performed relatively well globally. Wall Street’s resilience is notable, and US Treasuries have held up well compared to bonds from other developed economies, especially UK gilts.

Overall, the outlook for the dollar seems to be becoming brighter amid the conflict. The ICE US Dollar Index (DXY), which measures the dollar against a basket of major currencies, has appreciated rapidly by 2% this month. Although this pace of appreciation may not last, if the conflict or its effects persist into summer or longer, the dollar could still have room to rise further.

HSBC analysts said: “If oil prices, risk sentiment, and cross-asset volatility remain high, the dollar bulls are likely to continue to dominate.”

This is very different from the market consensus at the beginning of the year — back then, due to concerns over the Federal Reserve’s independence and expectations of rate cuts, Wall Street was bearish on the dollar. Interest rate futures markets initially projected at least a 50 basis point cut by the Fed this year. Now, the market has fully priced in only a 25 basis point cut.

Oil prices and the dollar “break 100” together — the impact should not be underestimated

In terms of magnitude, the dollar index rebounded about 5% from its four-year low at the end of January. Many industry insiders suggest that if the dollar continues to strengthen, it could force markets to reassess many of the assumptions for 2026, especially as rising oil prices rekindle inflation fears.

Note: Dollar Index Trend

In the “break 100” scenario, the most painful for economies heavily dependent on imports of energy. For example, the eurozone has seen the euro fall below 1.15 against the dollar. This means European companies face higher crude oil import costs and exchange rate losses due to dollar appreciation.

Many analysts believe this “double blow” creates a tightening effect similar to a de facto rate hike.

Additionally, for emerging markets burdened with large dollar debts (such as some Southeast Asian and Latin American countries), a strong dollar means exponentially higher debt repayment costs. When these countries are forced to use their precious foreign exchange reserves to defend their exchange rates or service debt, domestic infrastructure and social spending may be cut, increasing the risk of sovereign credit defaults.

Other negative impacts include global trade. Felipe Camargo, Chief Economist at Oxford Economics, pointed out that the resilience of global trade last year, despite US tariffs under President Trump, was partly due to the 10% depreciation of the dollar.

In 2025, global exports outside the US grew by 5.3%, well above the ten-year average of about 3%. In a dollar-dominated trade system, a weaker dollar makes dollar-priced goods cheaper, strengthening international trade links.

Camargo estimates that a 10% appreciation of the dollar could lead to a 6%-8% decline in global trade volume relative to current forecasts, erasing all of last year’s growth. Under this scenario, trade volume could be 5% below initial pre-tariff forecasts from early last year.

Furthermore, last year’s dollar depreciation boosted US corporate profits. If the dollar remains stable this year, that boost will disappear; if the dollar appreciates further, it could become a drag.

This is because 30% to 40% of the revenue of S&P 500 companies comes from overseas; for tech firms, the proportion exceeds 50%. Given the significant contribution of tech to overall US earnings, this is crucial. Tech stocks account for about one-third of the S&P 500’s total market value and contribute roughly one-fifth of total profit growth.

Historically, whenever the dollar enters a strong cycle, non-US markets tend to experience turbulence and wealth redistribution. This time, with oil and the dollar both “breaking 100,” investors may need to reassess all outlooks for the 2026 capital markets.

Guotai Junan Securities’ report earlier this week noted that the brief “break 100” for oil and the dollar occurred only once before — in April 2022, after the Russia-Ukraine conflict, lasting about a month. The simultaneous rise of oil and the dollar indicates heightened concerns about “re-inflation,” which Fed Chair Powell is likely to emphasize, signaling that he has completed his rate-cut mission.