The US dollar is strengthening again as the Iran war and a major oil supply disruption reshape global markets. Tanker attacks near the Strait of Hormuz have disrupted shipping routes and pushed crude prices back above the 100 USD level. Reports citing the International Energy Agency suggest the scale of disruption could be among the largest on record.

Rising energy prices have revived inflation concerns and driven investors toward the liquidity of the US dollar and US government bonds. At the same time, stronger oil revenues are improving the fiscal outlook for Gulf producers, creating a complex environment where regional income strengthens even as global financial conditions tighten.

Oil windfall meets a stronger dollar

In most cycles, higher oil prices are clearly positive for Gulf exporters. This time, analysts say the picture is more complex.

Oil has surged, but the dollar has rallied alongside it. Strategists note that investors are seeking deep liquidity during periods of geopolitical stress. The United States also benefits from its position as a net energy exporter, which can make its economy appear more insulated from supply shocks than large oil-importing regions.

The result is an unusual combination. Oil prices are rising, but so is the dollar. In earlier commodity cycles, oil rallies often coincided with weaker dollar conditions and abundant global liquidity.

Regional equity markets reflect this tension. Early optimism around stronger oil revenues has faded in some Gulf markets as global risk sentiment weakens. Analysts note that higher discount rates, geopolitical risk, and tighter financial conditions can weigh on valuations even when commodity prices are rising.

USD/JPY as a signal of global stress

One of the clearest signs of the stronger dollar environment is the move in USD/JPY. The pair has climbed back into the high-150s, approaching levels that previously triggered large-scale intervention by Japanese authorities.

Japan remains highly dependent on imported energy, including oil shipped through the Gulf. Rising crude prices increase import costs and can weaken the yen, especially while US yields remain relatively high.

This wide interest-rate gap continues to encourage carry trades, where investors borrow in yen and invest in higher-yielding dollar assets.

Some market strategists view USD/JPY as a useful indicator of global stress. A decisive move beyond previous intervention levels could signal that safe-haven demand for the dollar is dominating global currency markets. At the same time, the risk of renewed Japanese intervention adds another source of volatility.

Dollar pegs and regional funding conditions

Most Gulf currencies remain anchored to the US dollar. This peg helps protect regional exchange rates from the sharp swings seen in other emerging-market currencies.

However, a stronger dollar can still affect financial conditions across the region. Higher US yields tend to tighten global liquidity and increase borrowing costs.

For Gulf issuers tapping international markets, analysts say the environment may become more demanding. Investors often require higher returns and become more selective toward risk assets when global interest rates rise.

This dynamic highlights the importance of dollar liquidity. As investors increase allocations to money-market funds and short-dated US Treasuries, the cost of dollar funding can rise across global markets.

Gold, oil and shifting investor demand

Gold’s behaviour highlights the cross-currents shaping markets. The metal initially rallied when Middle East tensions escalated and the oil shock intensified.

More recently, however, the rally has slowed. A stronger dollar and higher real yields can reduce demand for bullion, even during geopolitical crises.

Oil remains central to the broader market story. Prices have surged due to disrupted supply, shipping risks, and uncertainty over how long the conflict will persist.

For Gulf producers, this environment supports stronger fiscal balances in the near term. Yet economists warn that a sustained oil shock could slow global growth and complicate inflation paths in major economies.

What markets in the Gulf are watching

Market participants across the region are focusing on three key developments.

The first is the trajectory of the conflict and whether shipping disruptions around the Strait of Hormuz intensify or ease. Any sign of de-escalation could reduce the oil shock and weaken safe-haven flows into the dollar.

The second is inflation data from major economies. Higher energy costs may influence how central banks adjust expectations for interest-rate cuts.

The third is policy signalling from Japan. If USD/JPY approaches levels linked to past intervention, authorities in Tokyo could act again, potentially triggering sharp moves in global currency markets.

For now, many analysts say markets are operating in a “dollar-first” environment. For the Gulf, that means navigating a rare mix of stronger oil revenues, firm currency pegs, and tighter global financial conditions — with the US dollar and energy markets at the centre of the story.

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