Dollar and VIX Move in Sync as Iran Conflict Supersedes Trade Tensions

Dollar's Relationship with Equity Market Volatility Revived by War in Iran

The war in Iran has revived the dollar's traditional relationship with equity market volatility, a sign that haven-seeking investors are finding safety in 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 at 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.

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During the 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," Campanella wrote in a note last week.

The Bloomberg Dollar Spot Index is down nearly 1.5% since the ceasefire agreement between the US and Iran was announced a week ago, erasing almost all of its war-time rally. The VIX, meanwhile, has fallen some seven points since then and traded just above the 18 level on Tuesday. At Deutsche Bank, strategists led by George Saravelos now recommend selling the US currency as risks linked to the Middle East conflict subside.

Bloomberg Intelligence strategists Audrey Childe-Freeman and Anthony Feld note that the war reinforces the structural dollar bear case and diversification strategies beyond the dollar in the longer term. Currency strategists at Scotiabank, led by Shaun Osborne, suggest that the dollar-VIX relationship is worth watching to gauge the currency's reaction amid the US blockade of the Strait of Hormuz.

However, gauging the extent to which haven buying is supporting the greenback is not an easy task, complicated by a range of factors including central bank policy, relative asset performance, and hedging decisions. The cross-currency basis, another metric, indicates that demand for the dollar is ebbing amid the tenuous ceasefire between the US and Iran.

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