Dollar Hits Six-Week High as Hormuz Escalation Revives Safe-Haven Flows

The US dollar index surged to 99.43 on 22 May, its strongest level in six weeks, as missile strikes on oil tankers in the Strait of Hormuz triggered a flight to safety that is reshaping global currency markets and threatening to unwind carry trades from Tokyo to Istanbul.

The move reflects more than simple risk aversion. Traders are repricing Federal Reserve rate expectations in response to sustained crude oil inflation, now pricing a 40% probability of a 25-basis-point hike by December 2026 according to CNBC. That marks a sharp reversal from expectations of 50 basis points of rate cuts before the conflict escalated in late February.

Energy Inflation Rewrites Rate Path

Brent crude traded at $110.80 per barrel in early May, a 58% premium to the pre-conflict baseline of $70, driven by supply losses exceeding 12.8 million barrels per day since Iran closed the Strait of Hormuz on 28 February. The closure, triggered by US-Israel airstrikes that killed Supreme Leader Khamenei, represents the largest geopolitical oil supply disruption in history, per the International Energy Agency.

The World Bank forecasts energy prices will surge 24% in 2026, the highest annual increase since the Ukraine invasion in 2022, with overall commodity prices up 16%. Indermit Gill, the bank’s chief economist, warned that the conflict is hitting the global economy in waves: “first through higher energy prices, then higher food prices, and finally, higher inflation, which will push up interest rates and make debt even more expensive.”

Emerging Market Currency Crisis Deepens

The dollar’s ascent is inflicting concentrated damage on emerging market currencies dependent on energy imports. India’s rupee hit a record low of 96.17 against the dollar on 18 May, down 5.5% year-to-date, while the country’s crude import bill has increased by $60 billion on an annualised basis, according to Univest Intelligence.

Turkey’s lira collapsed 7% in a single day on 3 May, its largest one-day decline since 2018, with $1.1 billion withdrawn from Turkish debt markets in May alone, per TheBoard.world. The velocity of capital flight suggests carry trade positions are unwinding rapidly as funding costs spike and currency volatility renders hedging prohibitively expensive.

Yen Approaches Intervention Threshold

The Japanese yen weakened to 159.03 per dollar on 20 May, approaching the 160 level that previously triggered currency intervention by Japanese authorities in late April and early May. Christopher Wong, currency strategist at OCBC, told CNBC that “near term, excessive volatility is key while 160/161 remains the line to watch.”

The dollar-yen move reflects not only safe-haven demand but also widening rate differentials as the Fed’s hiking probability rises while the Bank of Japan maintains ultra-loose policy. If USD/JPY breaches 160 decisively, a coordinated intervention involving the US Treasury becomes more likely, though such operations have historically provided only temporary relief.

Deal Negotiations Create Binary Outcome

The dollar’s rally faces an imminent test. US-Iran negotiators are reportedly 60% toward finalising a 60-day ceasefire framework that would reopen the Strait of Hormuz, impose a nuclear moratorium lasting 15-20 years, and provide sanctions relief, according to Axios. President Donald Trump stated on 23 May that “an Agreement has been largely negotiated, subject to finalization between the United States of America, the Islamic Republic of Iran, and the various other Countries.”

If the deal materialises and the Strait reopens, crude prices would likely fall sharply, unwinding the Fed’s inflation-driven hawkish repricing and eliminating the dollar’s safe-haven premium. Billy Leung, investment strategist at Global X ETFs, noted that “there’s a belief that a lot of this is negotiation tactics. Markets have reached peak uncertainty. The reaction function is no longer as extreme as before.”

Tech Sector Repricing Accelerates

The dollar’s strength and shifting risk appetite are compressing valuations in rate-sensitive sectors. Software equities have fallen roughly 30% year-to-date, while software-linked leveraged loans have dropped 15-20 points, concentrating losses in private equity-backed companies, according to BlackRock Investment Insights.

Higher-for-longer rate expectations and geopolitical uncertainty are constraining venture capital deployment in AI infrastructure, creating a bifurcated funding environment where only the largest, most capital-efficient projects secure backing. The repricing suggests investors are distinguishing between companies with near-term cash generation and those dependent on sustained low rates.

What to Watch

The completion or collapse of US-Iran deal negotiations will determine whether the dollar’s rally extends or reverses. If a ceasefire finalises and the Strait reopens within the next 30 days, expect crude to fall toward $85-90 per barrel, unwinding safe-haven premiums and easing pressure on emerging market currencies. Monitor USD/JPY for breaks above 160, which would likely trigger Japanese intervention and create short-term volatility spikes. Fed speakers in early June will provide clarity on whether policymakers view energy-driven inflation as transitory or structural, shaping December rate expectations. Finally, track leveraged loan pricing in the software sector — if spreads widen beyond 20 points, private equity sponsors may face forced asset sales, amplifying tech sector stress.