The US dollar is widely seen as a global safe haven, and during periods of geopolitical instability, it’s often assumed that wars always cause the USD to rise. While the dollar often strengthens in the early stages of conflict, especially in global crises, the idea that wars always boost the USD is a myth. The dollar’s behaviour during wars depends on multiple factors, including the war’s location, global involvement, economic fallout, and prevailing monetary policy.

Why the USD is expected to rise during war

1. Safe-haven status
In times of uncertainty, global investors often flock to the US dollar due to its liquidity, stability, and backing by the world’s largest economy.

2. Global reserve currency
The USD is used in global trade and held by central banks around the world, making it a go-to asset when risk appetite falls.

3. US Treasuries as a risk-off refuge
Wars often trigger flight-to-safety flows into US government bonds, strengthening demand for the dollar.

4. Historical precedent
Events like the Gulf War, the Ukraine crisis, or Middle East conflicts have sometimes seen a spike in USD demand as global markets react with fear.

Why the USD doesn’t always rise in war

1. Domestic involvement weakens the USD
If the US is directly involved in a war — especially one that’s prolonged or economically costly — confidence in the dollar can weaken due to rising deficits, inflation, and political risk.

2. Market already priced in the risk
In some cases, if a conflict is anticipated, the market may price it in before it begins. Once war starts, the reaction may be muted or even reversed.

3. Interest rate differentials matter more
Even during war, if the Federal Reserve is dovish and other central banks are hiking, capital may flow out of the US — weakening the dollar.

4. Risk shifts to other havens
In certain scenarios, currencies like the Swiss franc (CHF), Japanese yen (JPY), or even gold may act as stronger havens, drawing capital away from the USD.

5. Nature of the war matters

• Regional conflict: May have minimal impact on the dollar unless the US is involved.
• Global or economic wars (e.g. sanctions): May initially strengthen USD but create long-term imbalances.
• Cyber or asymmetric wars: Market response can be complex and tech-focused.

Examples of mixed USD performance during conflicts

• Gulf War (1990–91): USD weakened early, then stabilised as military success became clear.
• Russia-Ukraine war (2022): USD surged initially as a global safe haven.
• Iraq war (2003): USD weakened due to growing fiscal deficits and long-term uncertainty.
• Israel-Gaza conflicts: Limited impact on USD unless tensions escalate regionally.

How to assess USD strength during wartime

• Monitor Fed policy: Hawkish Fed = USD support, even in war.
• Watch global vs regional scope: Global panic strengthens USD; localised wars may not.
• Look at bond flows: Rising demand for Treasuries typically boosts USD.
• Compare with other havens: USD may lag behind CHF, JPY, or gold depending on sentiment.

Conclusion: Do wars always cause the USD to rise?

No — wars often lead to short-term USD strength due to fear and risk-off flows, but not always. The dollar’s movement depends on the war’s scale, US involvement, and broader macroeconomic conditions. Safe-haven flows, interest rates, and investor psychology all shape the outcome. Traders must go beyond the headline and assess context, not assumption.

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