Soon after the start of the war with Iran on February 28, the dollar, shown in Figure 1 below, rose some 3 percent. Although this increase was relatively small compared to earlier swings in the currency, it coincided with a sharp rise in financial volatility, as indicated by the VIX. Accordingly, the dollar’s rise has been taken as an indication that despite the depredations of Liberation Day and other Trump Administration policies, its status as a safe-haven currency is alive and well (Ahmed 2026; Brooks 2026; Lubin, 2026). However, there is another explanation for the behavior of the dollar, centering on the rise in oil prices (Scheid, 2026). Because the U.S. economy is a net oil exporter and relatively less exposed to disruptions in energy supplies, higher oil prices may have buoyed the dollar against the currencies of more vulnerable economies.
In this note, we assess whether the dollar’s rise at the conflict’s start was owed to its safe-haven status or to higher oil prices. The short answer: both. We also show that the most recent rise in the dollar was owed to neither its safe-haven status nor oil prices, but instead to rising expectations for US interest rates.
Figure 1: The dollar, oil prices, and the VIX
Column 1 in the table below presents results of a regression of the log-level of the DXY dollar index, a measure of the dollar’s value against a weighted average of major advanced-economy currencies, on: (1) the difference between US and a weighted average of foreign two-year Treasury yields, (2) the difference between the slope of the US yield curve (ten-year minus two-year) and the weighted average of foreign yield curves, (3) the VIX, and (4) the level of WTI oil prices. It is estimated on daily data through the end of December 2025.
The model fits well, and the coefficients on the explanatory variables are significant and correctly signed. Higher interest rates in the United States compared to abroad attract capital and boost the dollar. A higher VIX leads investors to purchase dollar assets for flight-to-safety reasons. Finally, increases in oil prices boost the dollar, likely for the reasons discussed above.[1]
Table 1: Estimates of Simple Dollar Regressions
| Explanatory Variables | (1) Log DXY Index OLS 2021-01-01 to 2025-12-31 | (2) Log DXY Index OLS 2026-06-01 to 2026-06-26 |
| 2yr Yield Differential | 7.028*** (0.264) | 6.937*** (1.150) |
| Yield Slope Differential | 2.081*** (0.323) | -1.163 (2.707) |
| CBOE Volatility Index: VIX | 0.044*** (0.017) | 0.152*** (0.021) |
| Crude Oil Prices: WTI | 0.025*** (0.007) | 0.034*** (0.006) |
| Constant | 448.770*** (0.514) | 444.445*** (1.588) |
| Observations | 1,156 | 108 |
| R-squared | 0.833 | 0.570 |
*** p<0.01, ** p<0.05, * p<0.1
Column 2 presents the results of the same equation but applied to 2026 alone—the results are broadly similar. As Figure 2 indicates, this equation tracks recent movements in the dollar reasonably well.
Figure 2: Actual and Predicted Levels of the Dollar during 2026
We then decomposed the model’s predictions (their fitted values) into the contributions of yield differentials (combining the contributions from both two-year yields and yield slopes), the VIX, and oil prices. Figure 3 below plots the data as deviations from their averages over the sample period. It makes clear that the runup to the dollar following the start of the Iran War reflected increases in both the VIX (in green) and oil prices (in blue). By May, financial markets started to shrug off worries that a protracted conflict would hamstring the global economy, leading to a fall in the VIX that helped to pull down the dollar, while by June, optimism for a ceasefire brought down oil prices, also restraining the dollar.
Figure 3: Drivers of Movements in the Dollar During 2026
Interestingly, yield differentials (in yellow) held back the initial rise in the dollar, as markets assumed foreign central banks would respond more to higher prices than the Fed. As lower oil prices alleviated the need for monetary tightening abroad, and as markets began anticipating a more hawkish Fed, yield differentials turned in favor of the United States, pushing the dollar to its highest levels since the war began. Going forward, assuming that the ceasefire holds (iffy) and that the Administration desists from other disruptive actions (iffier), differences in monetary policy stances here and abroad will likely maintain top billing in jerking around the dollar.
[1] The causality between the dollar and oil prices runs in both directions. While a positive shock to oil prices may buoy the dollar, a positive shock to the dollar tends to lower oil prices. In practice, however, and at least over recent years, shocks to oil prices appear to dominate the estimated relationship.