Is the other storm behind oil prices breaking 100: the dollar breaking 100?

How Will a Strong Dollar Impact Emerging Market Debt?

Cailian Press, March 19 (Editor: Xiaoxiang) As international oil prices and the US dollar index both surged past 100 in the past week, this rare Middle East conflict triggered by the US and Israel’s attack on Iran means investors must face higher oil prices and consider that the dollar’s strength may be even more pronounced than many expected at the start of the year…

Data shows that since February 28, when the US and Israel’s strike on Iran triggered regional conflict and nearly cut off nearly one-fifth of global oil supply through the Strait of Hormuz, the dollar has become one of the clearest “safe haven” winners.

The dollar’s performance has overshadowed all other safe haven currencies, including the Swiss franc and Japanese yen, and has outperformed traditional safe assets like government bonds and gold by a significant margin. Suddenly, the consensus that the dollar would weaken by 2026 seems outdated.

However, the unexpected strengthening of the dollar could also have far-reaching ripple effects, impacting global trade, growth, and markets. All else being equal, a stronger dollar will tighten financial conditions, erode US corporate profits, and drag down global trade. Emerging economies with large dollar-denominated debt will be hit hardest.

Why is the dollar the market’s winner?

The current safe haven appeal of the dollar seems logical in terms of market reasoning. US energy production is relatively self-sufficient, so it is less vulnerable to gasoline price spikes compared to other countries.

Of course, with US crude oil prices surpassing $90 per barrel, the US is not entirely unaffected. But in the forex market, the comparison between currencies is more critical.

In fact, although both are safe haven currencies, the Japanese yen is in a much worse position than the dollar, as nearly all of Japan’s energy depends on imports. This weakens the yen’s attractiveness during this crisis; meanwhile, another safe haven currency, the Swiss franc, faces downside risks — the Swiss central bank has warned it will intervene to limit excessive franc appreciation.

On the other hand, since the Middle East conflict erupted, US stock and bond markets have also declined but have performed relatively well globally. Wall Street’s resilience is notable, and US Treasuries have held up well compared to bonds from other developed economies, especially UK gilts.

Overall, the outlook for the dollar appears to be brightening amid the conflict. The ICE US Dollar Index (DXY), which measures the dollar against a basket of major currencies, has appreciated about 2% this month. Although this rapid appreciation may not last, if the conflict or its effects persist into summer or longer, the dollar could have further upside.

HSBC analysts said: “If oil prices, safe haven sentiment, and cross-asset volatility remain high, the dollar bulls are likely to continue to dominate.”

This contrasts sharply with the market consensus at the start of the year — back then, due to concerns over the Federal Reserve’s independence and expectations of rate cuts, Wall Street was bearish on the dollar. Interest rate futures at the beginning of the year priced in at least a 50 basis point cut by the Fed this year. Now, the market is only pricing in a 25 basis point cut.

The Impact of Oil and Dollar “Breaking 100”

In terms of magnitude, the dollar index rebounded about 5% from a four-year low at the end of January. Many industry insiders suggest that if the dollar continues to strengthen, it could force markets to reassess many of the assumptions for 2026, especially with oil prices surging again and reigniting inflation fears.

Note: Dollar Index Trends

In the “double break of 100” scenario, the most affected are economies heavily dependent on imports for energy. For example, the eurozone has seen the euro fall below 1.15 against the dollar. This means European companies face higher oil import costs and also suffer from exchange rate losses due to dollar appreciation.

Many analysts believe this “double hit” acts like a de facto rate hike, tightening financial conditions.

Additionally, for emerging markets burdened with large dollar debt (such as some Southeast Asian and Latin American countries), a strong dollar means exponentially higher debt servicing costs. When these countries are forced to use precious foreign exchange reserves to defend their exchange rates or repay debt, domestic infrastructure and social spending may be cut, increasing the risk of sovereign credit defaults.

Other negative impacts include global trade. Felipe Camargo, chief economist at Oxford Economics, pointed out that the resilience of global trade last year was partly due to the 10% depreciation of the dollar.

In 2025, global exports outside the US grew by 5.3%, well above the 10-year average of about 3%. In a dollar-dominated trade system, a weaker dollar makes dollar-priced commodities cheaper, strengthening international trade links.

Camargo estimates that a 10% appreciation of the dollar could reduce global trade volume by 6-8% relative to current baseline forecasts, wiping out last year’s growth. Under this scenario, trade volume could be 5% lower than forecasts before tariffs were implemented early last year.

Furthermore, last year’s dollar weakness boosted US corporate profits. If the dollar remains stable this year, that boost will disappear; if the dollar strengthens further, it will become a headwind.

This is because 30-40% of revenues for S&P 500 companies come from overseas; for tech firms, the proportion exceeds 50%. Given the significant contribution of tech to overall US earnings, this is crucial. Tech stocks account for about one-third of the S&P 500’s market cap and contribute roughly one-fifth of total earnings growth.

Historically, whenever the dollar enters a strong phase, non-US markets experience turbulence and wealth redistribution. This time, with oil and the dollar both “breaking 100,” investors may need to reassess all outlooks for the 2026 capital markets.

Guotai Junan Securities’ report earlier this week noted that the brief “double break of 100” in oil and the dollar occurred only once before, in April 2022, following the Russia-Ukraine conflict. At that time, both oil and the dollar rose for about a month. The simultaneous rise indicated heightened concerns about “re-inflation,” and Fed Chair Powell was expected to emphasize this risk, suggesting he had already completed his rate-cut cycle.

(Cailian Press, Xiaoxiang)