This week in Eastern Eight Time Zone, the situation in Iran escalated once again, with the tension in the Strait of Hormuz visibly heating up. The security of tanker shipping routes and energy supply has been frequently mentioned by the market. As geopolitical risks rise, safe-haven funds quickly flowed back into U.S. assets, the positive correlation between the U.S. dollar and the VIX panic index has been pushed to close to its highest level since 2024, and this combination of movements appeared in the markets once more. The market is asking again: why, in this round of Middle Eastern conflict, are investors returning to the classic model of “the dollar and panic rising together”? Is this just an emotional surge, or is there a reconstruction of the global safe-haven framework?

The Flames of War Closing In: Hormuz is Like a Trigger Alarm

The Strait of Hormuz is a narrow waterway that connects the Persian Gulf to the Gulf of Oman and the Arabian Sea, regarded as one of the most critical energy transportation corridors in the world. Global bulk energy transportation highly relies on this passage, and any news regarding military conflicts, blockade threats, or attack risks will be amplified by the market as a systemic disturbance to the energy supply chain. When the Iran conflict and Strait security are repeatedly mentioned at the same time, traders' first reaction is not actual losses but the possibility of extreme scenarios, thus quickly raising the risk premium.

From the transmission chain perspective, the geopolitical spark is first ignited at the crude oil expectation level: there’s no immediate need for spot prices to skyrocket, as long as the imagination of "supply disruption" is ignited, asset allocation will start to reprice energy risk in advance. Next, funds holding high-leverage risky assets begin to reduce positions, avoiding potential drastic fluctuations. The safe-haven sentiment spreads from the commodity market to the stock and credit bond markets, and investors then buy tools linked to U.S. assets to build a buffer for potential “black swans.” The simultaneous rise of the dollar and VIX is a tangible reflection of this chain reaction in financial prices.

Compared to previous rounds of Middle Eastern conflicts, this tension has both continuity and differences. On the one hand, as a key shipping route, markets instinctively enter a risk-defense mode whenever military friction occurs in this region, inheriting a tradition from previous crises. On the other hand, this round occurs in an environment where global growth is already weak and inflation and interest rates are at high adjustment levels. The IMF has lowered its growth forecast, making investors more sensitive to any additional shocks. Therefore, messages related to Hormuz are no longer just regional geopolitical news but are layered onto the already fragile structure of the global economy as an additional “weight.”

Panic Index Rises: Dollar Again Becomes a Safe-Haven Anchor

Currently, an eye-catching phenomenon is that the positive correlation between the U.S. dollar and the VIX panic index has approached its highest level since 2024. In classic textbooks, the dollar is often described as a “dual mirror of global liquidity and safe-haven sentiment”: when risky assets plummet and volatility rises, the dollar strengthens; when the market regains calm and volatility contracts, the dollar retraces part of its gains. The volatility triggered by the latest Iran conflict has once again awakened this traditional model.

In the current macro and regulatory environment, why do safe-haven funds still prefer U.S. assets instead of completely shifting positions to gold or other traditional safe havens? First, the dollar remains the core of global settlement and reserve currency; the conflict primarily drives up cross-border dollar demand, and only then comes the hedging function of other assets. Second, U.S. Treasuries and highly liquid dollar assets are still seen as the “last pool of liquidity,” allowing for quicker entry and exit during extreme events. Third, the global macro environment is complex, and some traditional safe-haven assets also bear policy and liquidity constraints. In contrast, dollar-denominated asset portfolios are more operational and profound.

In the past five years, the market has repeatedly verified the typical rhythm of “the dollar rises when volatility increases, and the dollar falls when volatility declines.” Whether it is the intense panic at the beginning of the pandemic, the subsequent liquidity flooding, or later tightening and rebalancing, whenever global risk appetite significantly decreases, the dollar will rise along with the VIX; and in phases of easing sentiment and falling volatility, the dollar usually weakens or retraces from high levels. The current narrative surrounding Iran and Hormuz merely brings this model to the forefront once again.

IMF Lowers Expectations: A Safe-Haven Increase Under the Shadow of Global Growth

As the conflict escalates, macro expectations are also turning cold. According to the latest information, the IMF has lowered the world economic growth forecast for 2026 by 0.2 percentage points to 3.1%, warning that if the Middle Eastern conflict continues to escalate, it may cause this year’s world economic growth rate to drop below 2.5%. For global capital, which has become accustomed to low interest rates and high growth stories, this set of data sends the signal that: in the coming years, the “growth ceiling” is being quietly lowered, and geopolitical shocks may accelerate this trend.

The deteriorating economic outlook is altering institutions' allocation logic toward dollar assets. When growth is no longer abundant, expectations for corporate profits and credit quality are being revised down, raising the opportunity cost of holding high beta assets. At this point, partially reallocating funds back into dollar assets, especially U.S. Treasuries and high-grade credit products with relatively advantageous interest rates and plentiful liquidity, has become a “basic action” to hedge against global growth risks. In other words, the buying in safe-haven markets is not just a short-term response to the conflict itself but a structural response to a bleaker global growth outlook.

When safe-haven sentiment and pessimistic growth expectations overlap, the linkage between VIX and the dollar is further strengthened. On one hand, the conflict amplifies short-term price volatility and pushes up implied volatility; on the other hand, macro signals like the IMF's lowered expectations deepen the consensus that “the next few years won't be too good,” making funds more willing to pay a premium for long-term defensive positions. Under the combined influence of these two forces, the panic index is no longer just a short-term emotional thermometer but, along with the dollar, reflects a systemic concern for the global economy and geopolitical landscape.

Wall Street Bets Divergence: Where Will the Dollar Go if Panic Subsides?

Within Wall Street, there is no consensus regarding the correlation between the dollar and VIX. Shawn Osborne, chief forex strategist at Scotiabank, has pointed out that if the Gulf situation fails to drive a substantial and sustained rebound in VIX, the dollar may further extend its decline. The core logic of this view is that part of the current strength of the dollar stems from “panic premium,” and once volatility declines and risk sentiment repairs, this premium will be gradually wiped away, resulting in adjustment pressures on the dollar.

From the trading structure perspective, this judgment corresponds to a bet on the time window and the sustainability of sentiment. If the market digests the Iran conflict and Hormuz tensions faster than expected, and VIX is unable to stay at high levels for too long, safe-haven positions will face concentrated liquidation in a short time, withdrawing support for the dollar, with short-sellers using “panic peaking” as a signal to position for dollar decline. However, if the conflict drags on and the situation fluctuates, the possibility of the dollar maintaining high-level consolidation or even rallying again remains.

This divergence reflects differing judgments on the persistence of geopolitical risks and whether the dollar's safe-haven premium can be sustained. Some institutions believe that the probability of this round of conflict being controlled more broadly is still high, and the market will eventually return to the traditional macro narrative of inflation, interest rates, and growth, with the dollar's strength being reshaped by fundamentals; while others argue that Middle Eastern risks have transformed from “marginal noise” to “structural variables,” indicating that even if short-term volatility recedes, the dollar's role as a safe-haven anchor will be strengthened over a longer cycle. These two expectations are interwoven in the market, creating the current tension under the linkage between the dollar and VIX.

How Long Can Panic and the Dollar Rise Together?

In summary, the latest Iran conflict and Hormuz tensions have rapidly reshaped the global safe-haven framework, leading to the formation of a phase where “the dollar and VIX rise together” once again. The conflict itself raised concerns over crude oil and supply chains, while the IMF's lowered global growth expectations deepened the pessimistic pricing about future growth. The combination of these factors has led to increased investment in dollar assets and volatility tools, forming the current basis for rising correlation.

Looking ahead, several key observation points will determine how long this pattern can be maintained: first, the trajectory of the conflict—whether tensions quickly cool and are locally controlled or evolve into a protracted tug-of-war; second, the expectations of passage and security in the Strait of Hormuz—once any substantial blockade or attack occurs, safe-haven sentiment will be further magnified; third, the feedback of global growth and policy data—whether the IMF's pessimistic expectations will be confirmed by actual data will influence institutions' adjustment pace for long-term allocations in dollar assets.

From the perspective of cryptocurrency investment, in an environment where the dollar strengthens and panic rises, opportunities and risks coexist. On one hand, if the model of “the dollar rises when markets are volatile” continues, cryptocurrencies may face passive selling and liquidity tightening amid high volatility, placing short-term price pressure; on the other hand, if the conflict intensifies concerns about traditional systemic risks, some funds may view cryptocurrencies as an alternative to hedge against regulatory and sovereign risks, flowing back after the panic recedes. For investors, the key lies in distinguishing between “emotional shocks” and “structural re-evaluations”: the former is more suitable for high-frequency trading and position management, while the latter determines the direction of mid-to-long-term allocations.

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