International Observation | Prolonged Middle East Conflict May Shake Safe-Haven Status of Dollar Assets

Xinhua News Agency Istanbul, March 19 — Title: Prolonged Middle East Conflict May Shake the Safe-Haven Status of U.S. Dollar Assets

Xinhua Correspondent Fu Yunwei and Ma Zegang

The spillover effects of the U.S.-Israel-Iran conflict are becoming increasingly evident. Geopolitical risks have become a key factor influencing global asset pricing and may accelerate the rebalancing of global asset allocation. In this process, the outlook for U.S. dollar assets is becoming more uncertain, and their traditional safe-haven properties are increasingly questioned.

Market analysts believe that if the Middle East conflict continues indefinitely, combined with factors such as significant U.S. exposure to risk in the war zone, rising international energy prices disrupting Federal Reserve policy adjustments, and structural risks in the U.S. financial markets, the safe-haven status of U.S. dollar assets may be undermined.

U.S. dollar assets have long been regarded by investors as hard currency, offering strong liquidity and safe-haven functions. During times of global geopolitical and financial turmoil, dollar assets tend to be highly sought after. Since the outbreak of this conflict, the dollar index has strengthened somewhat, but the overall gains are modest, and not all dollar assets have benefited equally from safe-haven premiums. There has been no sign of large capital inflows into dollar assets.

Reuters recently cited data from a U.S. emerging market securities fund research firm, reporting that in the week ending the 11th, global emerging market bond funds experienced net outflows of about $1.1 billion. The dollar index against six major currencies also did not rally continuously; on the 17th, it fell 0.13%, closing at 99.574.

Notably, yields on the U.S. 10-year and 2-year Treasury bonds have recently risen, which is inconsistent with the traditional safe-haven logic of declining yields during initial phases of geopolitical conflict, prompting some market participants to question the safe-haven nature of dollar assets. Some have even called it a “failure of dollar safe-haven.”

U.S. companies have hundreds of billions of dollars in direct investments in the Middle East, covering key sectors such as energy and digital infrastructure. These risk exposures are significant. According to reports from Reuters and other media, recent drone attacks by Iran damaged two data centers operated by Amazon’s cloud services in the UAE, causing power outages and affecting cloud service operations. This incident has raised concerns that U.S. and Western tech companies’ overseas digital infrastructure could become targets for military strikes.

In response, Pan Xiangdong, chief economist at Beijing-based Qilai Research Institute, told reporters that if U.S. and Western digital infrastructure continues to be targeted militarily, the risk premiums for U.S. corporate assets in the Middle East will be permanently adjusted upward. Operating costs will increase, expected returns will decline, and asset safety and profitability outlooks will be impacted. Technology assets are expected to be the first to face valuation pressure, further weakening their attractiveness.

Another market focus is whether the conflict will influence the Federal Reserve’s policy adjustments. Initially, under U.S. government influence, the Fed had been signaling rate cuts to stimulate economic growth before the conflict erupted. However, if the conflict leads to a prolonged increase in international energy prices, the resulting inflationary pressures could force the Fed to pause or delay rate cuts.

Patrick Mingham, an applied economics professor at Cardiff University Business School, believes that current market confidence in dollar assets is affected by U.S. domestic policy uncertainties. The U.S. government’s persistent fiscal deficits have raised doubts about long-term U.S. debt, and rising bond yields partly reflect investor concerns about future inflation and policy risks.

Meanwhile, structural risks in the U.S. financial markets have also raised alarms. The Financial Times recently reported that redemption requests in the first quarter for the flagship fund of Clifwatt, a U.S. firm, surged to 14% of its size, far exceeding the regulatory limit of 5%. Major Wall Street firms like BlackRock, Blackstone, Morgan Stanley, and private credit institutions such as Blue Owl have also faced mass redemptions, triggering redemption restrictions. Market analysts worry that the U.S. private credit industry, worth trillions of dollars, may be facing a liquidity crisis, with potential chain reactions that should not be underestimated.

Australian economist Guo Shengxiang pointed out that if the Middle East conflict cannot be resolved in the short term, investors will likely withdraw more heavily from high-risk assets like private credit. In such a scenario, institutions may be forced to sell assets at distressed prices, exacerbating market downturns. Without proper regulatory and bailout measures, the U.S. private credit sector could face a systemic crisis triggered by mass redemptions.

Hisham Farag, a finance professor at Birmingham University, UK, believes that in recent years, countries have become more aware of the political risks within the dollar system and are exploring ways to reduce dependence on the dollar, such as expanding local currency settlements or using other reserve assets. While the dollar remains the main safe-haven asset globally, factors like U.S. trade policies could weaken it again, gradually changing the global capital allocation structure.

Pan Xiangdong also believes that prolonged conflicts could undermine the foundation of the petrodollar system. Coupled with the global push toward de-dollarization, this would weaken the dollar’s credibility and prompt long-term global capital to reassess asset allocation strategies, gradually reducing the proportion of dollar assets. Its long-term valuation and attractiveness are expected to decline accordingly.

Shanshuo Jinke Group CEO Chang Shishan stated that for investors, geopolitical conflicts often cause short-term market sentiment swings and asset price adjustments. However, from a longer-term perspective, the key determinants of international capital flows remain institutional stability, financial system maturity, and openness. While wars may alter regional power dynamics, the fundamental logic of capital seeking stable financial hubs and efficient financial centers remains unchanged. (End)