U.S. Dollar Index just soared; Here’s why

The U.S. Dollar Index (DXY) rose sharply during the weekend between February 27 and March 2 and is, at press time on Monday, at approximately 98.37: its highest value in over a month.

The 0.74% DXY weekend rally can largely be attributed to the regional conflict that erupted following an American-Israeli attack against Iran early on Saturday and the subsequent retaliatory escalation.

Why the DXY is soaring

The Index – which tracks USD’s performance against a basket of multiple other major currencies – was arguably most sensitive to the widespread bombings of oil and other energy infrastructure and trade routes in the Persian Gulf.

At press time on March 2, most major global fossil fuel producers remain largely true to the decades-old agreement to trade the relevant commodities denominated in the American currency.

Along with the importance of the USD on the world stage, part of the rally can be attributed to the weakness of multiple currencies that are measured for the DXY. 

European and Asian currencies losing ground amidst Hormuz closure

The Euro (EUR) has plummeted over the weekend due to mounting concerns about energy prices in Europe. 

The E.U. has been under substantial pressure for years due to its mostly cutting itself off from Russian oil and natural gas amidst the war in Ukraine, making it increasingly reliant on American and Middle Eastern supply.

Several Asian and Oceanic currencies, such as the Chinese Yuan (CNY) and the Australian Dollar (AUD), have also taken a sharp downward turn amid mounting risk-off sentiment. 

Markets in East Asia and the Pacific are especially susceptible to the ongoing conflict as they are the most reliant on shipments through the Strait of Hormuz, a narrow waterway separating Iran from the Arabian Peninsula. 

For their part, the ‘safe’ assets like the Swiss Franc, Gold, and Silver have all been rallying.

What is next for the U.S. Dollar Index (DXY)

Lastly, at press time on Monday, March 2, the overall situation is likely to escalate further and could, after the latest partial correction within the weekend rally, send the DXY flying even higher.

Reportedly, Saudi Arabia is closing down one of the largest fields operated by the oil giant Aramco (TADAWUL: 2222) following an Iranian bombing of the facility.

DXY on the rise through February

Elsewhere, it is worth noting that DXY has been gaining ground even before the conflict in the Middle East was restarted in the middle of the U.S.-Iranian negotiations, as February was already anticipated to be the first green month since October for the American currency.

The major catalyst for the rise in the final days of the previous month came from a report showing that the Producer Price Index (PPI) rose 0.5% within a month.

Still, even before the bombs actually started falling, the anticipated attack on Iran was getting priced in as a war – and Iran’s response to it – were widely anticipated between President Donald Trump’s remarks, his administration’s previous actions, and official statements made by the Islamic Republic.

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