Oil prices drive dollar to regain "safe haven" status, but how far can this rally go?

Bloomberg Finance APP has learned that the negative correlation between the U.S. dollar and U.S. stocks has recently reached its highest level in nearly a year, reaffirming the typical relationship between assets associated with the dollar’s safe-haven status. Data shows that since the outbreak of war in the Middle East at the end of last month, the Bloomberg U.S. Dollar Index has risen nearly 2%, while the S&P 500 has fallen over 2%. This change has caused one of the short-term correlation indicators between the two to drop to its lowest negative level since early 2025.

Strategists attribute this round of dollar movement to its correlation with soaring oil prices—significant increases in oil prices benefit the U.S., the world’s largest oil producer. If this trend continues, it will strengthen the dollar’s role as a core tool for traders to hedge their exposure, a function the dollar has struggled to perform effectively for months.

Andrew Watrus, a currency strategist at Morgan Stanley for the G10 group, emphasized: “For large real-money investors, the most critical factor is always the correlation between assets.” He further noted that for most of the past two weeks, “the dollar and the stock market have continued to show a highly significant negative correlation.”

For years, the dollar’s movements have generally been inversely related to U.S. stocks—when demand for risk assets weakens, investors tend to turn to the dollar for safety; conversely, when risk appetite increases, dollar holdings may decrease. However, this traditional relationship experienced a notable reversal last year. Specifically, in April last year, President Trump’s comprehensive tariff policies triggered a wave of U.S. asset sell-offs, leading the dollar to perform its worst since the 1970s in the first half of the year.

The core driver of this correlation reversion is the U.S. position as the world’s largest oil producer and the dollar’s special role as the primary currency in global oil trade. Especially as WTI crude oil prices surged over 40%, this significant increase directly boosted market demand for the dollar.

Watrus from Morgan Stanley emphasized: “In the G10 currency system, the dollar is the only currency that combines safe-haven attributes with deep ties to energy-exporting economies, so its strength is entirely logical.”

Meanwhile, the surge in oil prices has reignited market fears of inflation, prompting investors to sharply reduce expectations for Fed rate cuts. This shift in expectations has exerted downward pressure on the stock market. Last week, Deutsche Bank strategists Parag Tath and Binky Chada specifically pointed out that the negative correlation between the S&P 500 and oil prices has reached “an almost perfect level,” making this high correlation a key indicator in current market analysis.

Bob Savage, head of macro strategy at Bank of New York Mellon Markets, noted in a client report on Monday that, besides soaring energy costs, the dollar has also been supported by U.S. investors repatriating funds amid geopolitical uncertainties.

However, the sustainability of the dollar’s safe-haven status remains uncertain—if oil prices fall sharply, investors might refocus on factors like tariff disputes and U.S. fiscal deficits, which are generally bearish for the dollar. More concerning is the risk of prolonged conflict: if geopolitical tensions keep oil prices high, it could dampen U.S. economic growth by constraining consumption and investment, ultimately undermining the dollar’s safe-haven appeal.

Bloomberg industry research strategists Audrey Child-Freeman and Ting Nguyen warned in a joint report: “The current price trend has fully validated the bullish outlook for the dollar, but caution is needed in distinguishing the drivers—whether it’s short-term short covering or the true beginning of a sustainable upward trend. This distinction is crucial for assessing the dollar’s future trajectory.”