Can the US dollar and US Treasuries still serve as safe havens? This conflict with Iran provides the answer

A sudden geopolitical crisis is directly testing whether the foundations of the US dollar and US Treasury bonds as global safe-haven assets remain solid. From market trends, the safe-haven status of the US dollar and US Treasury bonds is facing increasing skepticism.

According to reports from Wall Street Insight citing CCTV and Global Network, in the early hours of the 12th, Israel launched airstrikes on dozens of targets related to Iran's nuclear program and other military facilities, naming the operation "Lion's Strength." The Israeli Prime Minister stated that military actions against Iran's nuclear facilities would continue for several days until the threat is eliminated. Iran launched over 100 drones at Israel, and the Israeli city of Tel Aviv was attacked, including 10 nuclear facilities.

As the conflict between Israel and Iran escalates suddenly, financial markets are experiencing severe turbulence, with the market fear index VIX sharply rising, global stock markets under pressure, oil prices soaring, and safe-haven gold rebounding strongly, while the US dollar and US Treasury bonds, which also have safe-haven attributes, are showing a "calm" response, with the dollar initially reacting by falling.

Reports indicate that under the multiple pressures of Trump's trade policies, soaring fiscal deficits, and doubts about US global leadership, the traditional safe-haven halo of the US dollar and US Treasury bonds is facing a critical test.

Hebe Chen, an analyst at Vantage Markets, pointed out, "For assets like the US dollar and yen, the 'safe-haven paradise' label is built on three pillars: economic stability, liquidity, and credibility. This year's weakness of the US dollar is exposing cracks in these three areas."

A Disruptive Moment for the Safe-Haven Logic of the US Dollar and US Treasury Bonds

Market reactions have already indicated the issue. When news of Israel's airstrikes on Iranian targets broke, US Treasury bonds only saw a slight increase (the 10-year Treasury yield fluctuated little), and the initial reaction of the dollar was not the traditional safe-haven rise, but an unexpected drop, which later rebounded only after oil prices surged by 10%.

Analysis indicates that this rebound is more like a technical correction based on economic fundamentals rather than a traditional influx of safe-haven funds. Bloomberg strategist Mark Cudmore stated:

"This will not be a matter of safe-haven fund flows, but rather the fact that the US is the world's largest oil producer. Given that the dollar has just hit a multi-year low, the downside stop-loss has been cleared, and the short-term market will be caught off guard by the rebound, which means it could become a self-sustaining rise."

In contrast to the movements of the US dollar and US Treasury bonds, safe-haven gold surged, breaking through $3,400, while international oil prices skyrocketed, with WTI crude oil futures rising over 10% at one point. The fear index VIX soared sharply, putting pressure on stock index futures

Some analysts believe that:

This cross-asset reaction is a typical manifestation of geopolitical rupture, with energy and gold soaring as safe-haven tools, the VIX index climbing due to anticipated event risks, and the stock market retreating under the heavy pressure of uncertainty. More significantly, there is a slump in bond demand.

Historically, during severe geopolitical stress, U.S. Treasury bonds have typically served as a universal safe-haven asset. However, this time, Treasury bonds have hardly been sought after, while commodities have surged, indicating that market confidence in sovereign debt as a risk-free haven is fracturing.

As U.S. fiscal credibility comes under pressure and the global de-dollarization narrative accelerates, capital is no longer instinctively turning to bonds as it once did. Instead, funds are flowing into hard assets like oil, metals, and volatility. This indicates that the monetary and geopolitical framework of the past 40 years is gradually disintegrating.

Triple Crisis Shakes the Foundation of the Dollar

This unusual "drop then rise" performance not only contrasts sharply with the historical pattern of geopolitical crises immediately strengthening the dollar but also reflects the loosening of the dollar's safe-haven status.

Notably, the dollar index hit a three-year low on Thursday, just as geopolitical tensions escalated, with market skepticism about the dollar's safe-haven properties reaching unprecedented heights.

Analysts believe that the dollar's current predicament stems from the intersection of multiple structural issues.

The dollar index has fallen about 8% this year, and President Trump's efforts to reshape global trade are eroding investor confidence in the U.S. economic growth outlook. Rodrigo Catril, a strategist at the National Australia Bank, pointed out:

"A theme worth noting is whether the dollar's safe-haven properties are being diluted by the U.S. government's trade policies, fiscal profligacy, and challenges to the rule of law."

Even more concerning is that proposed tax legislation is expected to add trillions to the federal deficit over the next decade, while the U.S. role in security and political alliances is also being questioned.

U.S. Secretary of State Rubio stated that the U.S. "is not involved" in Israel's attack actions, while warning Iran not to retaliate against U.S. interests or personnel.

Analysts say this statement reflects the Trump administration's more cautious stance on Middle Eastern issues and further highlights the marginalization of U.S. influence in geopolitics.

As Catril noted, "Another issue facing the dollar's safe-haven status is that the U.S. seems to be stepping back from its dominant geopolitical role, opening the door for other countries to pursue their own agendas."

Shoki Omori, chief strategist at Mizuho Securities in Tokyo, also observed:

"Clients are increasingly inquiring about and discussing the hedging role of the US dollar in their portfolios. Depending on how the Trump administration conveys its stance on the attacks—such as by hinting at future involvement—US Treasuries and the dollar may face further selling pressure."