There is a contradiction sitting in plain sight, and almost everyone reading the tape gets it backwards.
Read the headlines and the story writes itself: US strikes on Iran, three oil tankers hit in the Strait of Hormuz, the ceasefire cracking, and the dollar climbing to a five-week high as investors run for cover. Safe-haven demand, the wires say. The greenback as the world's bunker.
Now read the actual moves. The DXY reportedly ticks up a modest 0.6% (per an earlier Monday session reaching 98.187, its highest since late January). Brent reportedly rises 3% to $74 a barrel — its largest daily jump since June 2, per MUFG — and then just sits there, well below its recent highs. This is a shooting war at the world's most important oil chokepoint producing a rounding error in the currency and a spike that fizzles.
This is a shooting war at the world's most important oil chokepoint producing a rounding error in the currency and a spike that fizzles.
Adam Tooze reportedly flagged that traffic through the Strait of Hormuz dwindled further in early June. Why?
Last week the dollar story was a holding pattern — MUFG had markets "waiting for the next catalyst," grinding lower on soft payrolls. This week the catalyst arrived in the form of renewed US strikes and tankers hit in Hormuz. The escalation is real. The market's reaction to it is where the received wisdom falls apart.
Start with the safe-haven claim, because it is mostly a misnomer, and we can prove it.
The AEI ran the obvious regression: DXY on four things — the US-minus-foreign two-year yield differential, the yield-curve slope differential, the VIX, and WTI oil prices. Fit it over five years of daily data, then over 2026 alone. The coefficients come out significant and correctly signed. Higher US rates lift the dollar. A higher VIX lifts the dollar (flight to safety). Higher oil lifts the dollar, because the US is a net oil exporter and Europe and Asia are not.
So when the Iran war began on February 28 and the dollar rose about 3%, what drove it? AEI's answer: "both" — the runup reflected increases in the VIX and in oil prices. Genuine safe-haven demand plus an energy-exporter premium. Fair enough. That leg was real.
But then the decomposition gets interesting. By May, markets stopped fearing a protracted conflict, the VIX fell, and that pulled the dollar down. By June, ceasefire optimism dragged oil lower, restraining it further. The two "safe-haven" channels went into reverse.
And the most recent leg up — the one now being sold as flight-to-safety — was, in AEI's flat phrasing, "owed to neither its safe-haven status nor oil prices, but instead to rising expectations for US interest rates."
Here is the detail that should end the debate. Through the early war, yield differentials actually held the dollar back. Markets assumed foreign central banks would respond more aggressively to the price shock than the Fed would — so the rate channel was a drag, not a boost.
Then oil eased, foreign tightening pressure faded, and the market started pricing a more hawkish Fed. Yield differentials flipped in America's favor and pushed the dollar to its highest since the war began. The tank didn't do this. The rates desk did.
You can see the same fingerprint in this week's tape. MUFG has the two-year Treasury yield up 7bps to 4.18%, the ten-year up 8bps to 4.55%, and markets now fully pricing one more Fed hike by October. FXStreet's read of the same session is telling: it credits the dollar's firmness to "energy-driven inflation fears" that lift Fed hike bets and push up yields. That is not a flight to safety. That is a rate story wearing a war costume.
ING's three channels, properly understood, say the same thing. US energy independence versus European and Asian dependence — that's the oil channel. The Fed less able to cut as inflation resurfaces — that's the rate channel. And a reversal of portfolio flows out of emerging markets — which is downstream of the first two, not an independent panic.
So decompose cleanly: the dollar's Iran-shock behavior is an oil channel plus a rate channel, and by the time the moves got violent, the rate channel was doing nearly all the work. The "safe-haven surge" is the residual, and it's shrinking.
That resolves half the puzzle. Now the other half — why the war moved less than the tariffs.
The answer is that markets are pricing Hormuz as a transient supply shock and priced the tariffs as a permanent regime change. One is a flare-up. The other rewired the terms of trade.
The evidence for "transient" is sitting in the price. Brent jumped 3% and stopped at $74 — below recent highs — even after renewed US strikes and tankers hit in the strait. If markets believed Hormuz was permanently compromised, oil would not be mean-reverting to a handle that starts with a seven.
Better still, look at the pump. In the week ending July 6, US diesel fell for the ninth straight week — down another 9 cents to $4.58 — and gasoline for the eighth, down 5 cents to $3.78. Retail energy is falling while the war escalates. That is not what a structural supply crisis looks like; it's what a priced-and-fading geopolitical spike looks like.
Contrast that with a tariff. A tariff doesn't spike and revert. It relocates supply chains, resets relative prices, and changes the rules of who trades what with whom — permanently, or at least until reversed by another act of policy. Markets hate that far more than they hate a chokepoint scare, because a chokepoint reopens and a rewired trading system does not.
So the "odd risk disconnect" isn't a puzzle at all. It's markets correctly distinguishing a transient shock, absorbed through oil and rates, from a durable regime change to the trading system itself. They convulsed more at the regime change because the regime change was the bigger, more permanent event.
Note that this pricing is dispassionate about who is winning. The Noahpinion blog reportedly calls the Iran episode a US defeat — Iran dispersed its missiles, blockaded Hormuz, forced a retreat. Markets don't appear to be trading the humiliation. They're trading the oil path and the rate path, and both say "temporary."
Which brings us to the one uncomfortable place this lands.
If the durable dollar premium from all this comes through the rate channel rather than the tank — and the AEI decomposition says it does — then the geopolitical shock is now being transmitted almost entirely through Fed expectations. The dollar's fate rests on reading the Fed's reaction function.
And that is precisely the channel getting harder to read. In the same list of AEI work sits a piece on Kevin Warsh "throwing the reaction-function baby out with the dot-plot bathwater" — an argument that, per its title, belongs to that piece and not this one.
That is the real risk. Not that Hormuz burns. Markets have shown they can price a chokepoint scare as transient and watch diesel fall through it. The risk is that the war's dollar premium now feeds into an information vacuum — a rate channel doing all the work, at exactly the moment the rate channel is hardest to interpret.
The safe-haven dollar was always the lazy story. The real story is that a war got routed through oil and rates, oil is reverting, and rates are now flying half-blind.