Middle East Conflict Could Undermine the Appeal of US Dollar Assets as Safe Havens

Istanbul (ANTARA) - Rising tensions involving Israel, Iran, and the United States (US) are raising doubts about the traditional appeal of US dollar-denominated assets as safe havens, as geopolitical risks increasingly influence global asset pricing and capital flows.

Market analysts warn that a prolonged conflict could erode confidence in US dollar assets through several channels, including significant US corporate exposures in the region, potential energy-triggered inflation pressures that could disrupt US Federal Reserve (The Fed) policies, and increased structural vulnerabilities in US financial markets.

Since the latest escalation, the US dollar index has only strengthened moderately, with limited gains, and not all dollar-denominated assets are benefiting evenly.

According to a Reuters citation from US-based Emerging Portfolio Fund Research data, global emerging market bond funds recorded net outflows of around 1.1 billion US dollars (1 US dollar = Rp16,967) for the week ending 11 June. Meanwhile, the US dollar index, which measures the greenback against six major currencies, fell 0.13 percent on 17 June and closed at 99.574.

In particular, yields on 10-year and 2-year US Treasury bonds have recently risen, deviating from the usual crisis pattern where yields fall, leading some analysts to describe this trend as a failure of safe-haven assets.

US companies hold direct investments worth tens of billions of US dollars across the Middle East, covering sectors such as energy and digital infrastructure, making them highly vulnerable to regional risks. According to media reports, a recent Iranian drone attack damaged two data centres operated by Amazon’s cloud computing platform in the United Arab Emirates, causing power outages and disruptions to several services. The incident underscores the risks faced by US corporate assets in the region, particularly digital infrastructure.

Pan Xiangdong, chief economist at QiLai Research Institute, told Xinhua that sustained targeting of such infrastructure could increase risk premiums on US corporate assets in the Middle East and pressure valuations, especially in the technology sector.

The dominance of the US dollar is also facing long-term challenges. Hisham Farag, a finance professor at the University of Birmingham in the UK, said that countries are increasingly paying attention to political risks associated with the US dollar system and are exploring alternatives such as expanding transaction settlements in local currencies and diversifying reserve assets.

Another major concern is whether the conflict will alter The Fed’s policy direction. Before the escalation, The Fed had signalled potential interest rate cuts under pressure from the US administration to support economic growth. However, if the conflict drives global energy prices into a sustained surge, The Fed may be forced to delay its easing plans.

Adding to this uncertainty, Patrick Minford, professor of applied economics at Cardiff Business School in the UK, stated that confidence in US dollar assets is also pressured by domestic policy uncertainty. Persistent US fiscal deficits could erode confidence in long-term US Treasury bonds, while rising bond yields reflect growing investor concerns about inflation and policy direction.

Meanwhile, structural vulnerabilities in US financial markets are coming under increasing scrutiny. The Financial Times recently reported that redemption requests for the US-based flagship Cliffwater fund surged to 14 percent of its total size in the first quarter, far exceeding the 5 percent quarterly limit set by regulators.

Major Wall Street firms, including BlackRock, Blackstone, Morgan Stanley, and private credit firm Blue Owl, are also facing waves of investor withdrawals, triggering redemption restrictions.

Australian economist Guo Shengxiang warned that withdrawal pressures could trigger systemic risks, with investors potentially accelerating withdrawals from higher-risk assets if the conflict continues.

The dominance of the US dollar is also facing long-term challenges. Hisham Farag, a finance professor at the University of Birmingham in the UK, said that countries are increasingly paying attention to political risks associated with the US dollar system and are exploring alternatives such as expanding transaction settlements in local currencies and diversifying reserve assets.

Pan added that a prolonged conflict could weaken the petrodollar framework, accelerate de-dollarisation, and trigger a structural reassessment of US dollar-denominated assets.

Chang Shishan, CEO of Cedar FinTech Group in the Middle East, stated that while geopolitical events tend to trigger short-term market volatility, ultimately capital will flow to stable and efficient financial systems, a dynamic that could shape the role of the US dollar in the coming years.