Dollar Strengthens as US-Israeli Strikes on Iran Reshape Currency Markets
Currency markets moved decisively on Monday, February 28, after a weekend of coordinated US Israeli airstrikes against Iran under the operation codenamed Operation Epic Fury killed the Islamic Republic's supreme leader and triggered retaliatory missile strikes across several Gulf states. The DXY dollar index surged as much as 0.8%, reaching a five week intraday peak of 98.566 , as traders moved rapidly to reprice risk across foreign exchange, rates, and energy markets [1]. Dollar and Treasury Dynamics The dollar's advance reflected a classic flight to liquidity response, though analysts noted the reaction was more measured than the geopolitical significance of the events might suggest. Strategists at Monex Europe observed that the DXY's gain of under one percent from Friday's close was "somewhat surprising" given the scale of the military action, and concluded that the dollar's short term trajectory would depend on whether the conflict appeared contained or escalating [1]. The dollar's strength came alongside a concurrent sell off in US Treasuries, a combination that confounded straightforward safe haven narratives. The yield on the 10 year Treasury note climbed by 9 basis points to 4.051%, while the two year yield rose by approximately 10.8 basis points. Marc Chandler of Bannockburn attributed the simultaneous dollar strength and bond weakness to a mix of factors. "It's a mix of position realignments and the inflationary effects of elevated oil prices," Chandler said, noting that investors were now pricing a Federal Reserve rate cut in September rather than July [1]. The repricing of Fed expectations reflected a judgment that energy driven inflation from a prolonged Middle East conflict would give the central bank less room to ease policy in the near term. Oil prices surged by their largest single session margin in four years after the effective closure of the Strait of Hormuz cut off crude supply routes, reinforcing concern about a second inflationary wave. Asian Currencies Under Pressure Across Asia, currencies broadly weakened as regional markets absorbed the news. The pattern was consistent with historical episodes of Middle East escalation, in which emerging market and export oriented currencies tend to underperform as dollar demand rises and commodity import costs increase simultaneously. Thierry Wizman of Macquarie Group placed the dollar's performance in a longer historical context, noting that the currency's fortunes have tracked closely with the perceived effectiveness of US foreign policy engagement. The Persian Gulf War of the early 1990s, he argued, had underwritten a decade of dollar appreciation because it carried broad multilateral backing. The War on Terror, by contrast, lacked that support and coincided with a prolonged dollar decline. "The dollar struggles when international engagements falter," Wizman remarked, leaving open the question of whether the Iran strikes would generate the kind of clear, internationally supported outcome that historically drives sustained dollar strength [1]. Swiss Franc Hits 2015 High Versus Euro Among the more dramatic moves was the Swiss franc , which touched its strongest level against the euro since 2015, the year the Swiss National Bank abandoned its exchange rate peg. The surge reflected intense demand for safe haven instruments beyond the dollar itself, as investors spread defensive positioning across multiple currencies. | Currency Pair | Direction | Notable Level | | | | | | DXY Dollar Index | +0.8% | 98.566 (5 week high) | | EUR/CHF | Euro strengthens after SNB peg era low | 0.9032 intraday trough | | Asian Currency Basket | Broadly weaker | Multi week lows | | Bloomberg Dollar Spot Index | +0.4% | Multi week high | The franc softened from its highs after reports emerged that President Trump had expressed willingness to reconsider sanctions on Iran and that Iran's security chief Ali Larijani was advocating for renewed nuclear negotiations. Chris Turner of ING suggested the franc's strength could eventually redirect attention to the Swiss National Bank's potential return to negative interest rates as a tool to curb excessive appreciation [1]. Fed Expectations and Rate Outlook The shift in Federal Reserve rate cut expectations from July to September represented a meaningful repricing of the monetary policy calendar. Before the strikes, traders had assigned a meaningful probability to a July cut as the first move of 2026. The inflation implications of sustained high oil prices and the supply chain disruptions flowing from a Strait of Hormuz closure were sufficient to push that timeline back by roughly two months in derivatives markets. The nomination of Kevin Warsh as the incoming Federal Reserve chair, announced in late January, added a further layer of uncertainty to the rate outlook. Warsh, nominated by President Trump to succeed Jerome Powell when Powell's term expires in May, is regarded as relatively hawkish on inflation and has publicly advocated for reducing the Fed's balance sheet. Economists at Deutsche Bank noted that Warsh would need to persuade his colleagues that rate cuts were warranted, a case unlikely to gain traction unless labor market conditions deteriorated or inflationary pressures eased significantly [2]. | Indicator | Pre Strike | Post Strike | | | | | | DXY Dollar Index | ~97.8 | 98.566 (peak) | | 10 Year Treasury Yield | ~3.96% | 4.051% (+9 bps) | | 2 Year Treasury Yield | ~3.38% | ~3.49% (+10.8 bps) | | First Fed Cut Expectation | July 2026 | September 2026 | | Oil Price Move | Stable | Largest surge in 4 years | References [1] The Wall Street Journal, "Dollar Strengthens After Attack on Iran" (February 28, 2026): https://www.wsj.com/finance/currencies/asian currencies mostly weaken after strikes on iran abf2d8ce [2] CNBC, "Trump picks Kevin Warsh for Federal Reserve chair to succeed Powell" (January 30, 2026): https://www.cnbc.com/2026/01/30/trump nominates kevin warsh for federal reserve chair to succeed…