Dollar and VIX Index Rebound as Iran Tensions Overshadow US Tariff Hopes
Dollar's Haven Status Revived Amid War in Iran
The dollar's traditional relationship with equity market volatility has been revived by the war in Iran, a signal that haven-seeking investors are finding safety in the US assets they snubbed after last year's tariff turmoil. The greenback's correlation to the CBOE Volatility Index has turned increasingly positive since the start of the war and is now approaching levels last seen in 2024. This marks a return to the trend seen for much of the past five years, with the dollar rallying in periods of volatility and falling when equity markets are calmer.
The relationship was upended by US President Donald Trump's universal tariffs last year, which prompted global investors to reconsider the merits of high exposures to US assets. For much of 2025, if US equity market jitters were on the rise, more often than not the dollar was falling in concert. However, with the current conflict in the Middle East, the dollar has been "significantly" more correlated to equity market volatility than to oil prices.
According to Edoardo Campanella, a research economist at UniCredit SpA, when global risk aversion abruptly spikes, investors revert to the most-liquid currency in the system: the greenback. Currency strategists at Scotiabank, led by Shaun Osborne, chief currency strategist, are now monitoring the dollar-VIX relationship closely to gauge the currency's reaction as the US moves to blockade the Strait of Hormuz, especially if stock swings are dampened in the days ahead.
| Year | Dollar's Correlation to VIX Index |
|---|---|
| 2020 | -0.2 |
| 2021 | -0.1 |
| 2022 | 0.1 |
| 2023 | 0.3 |
| 2024 | 0.5 |
| 2025 | -0.2 |
| 2026 (as of current date) | 0.4 |
Still, gauging the extent to which haven buying is supporting the greenback is not an easy task. It's complicated by a whole range of factors — from central bank policy to relative asset performance to hedging decisions. By at least another metric, the cross-currency basis, demand for the dollar is ebbing amid the tenuous ceasefire between the US and Iran.
Investor Takeaway
Investors should be cautious of the potential impact of global tensions on the US market.
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