Conflict in the Middle East triggered a sharp increase in oil prices. WTI crude oil futures rose from roughly $65 per barrel to over $119 by the March 9 trading session — an 84% gain in just over a week. That kind of upward volatility has implications far beyond the pump.
Two-year inflation breakevens spiked from 2.8% to 3.2% as markets reassessed the inflation outlook. More critically, expectations for Fed easing plummeted. Prior to the conflict, the CME FedWatch tool showed the market pricing roughly 50 basis points of rate cuts by year-end 2026. That number decreased to approximately 0 basis points of cuts by March 23.
The thesis behind this shift seems fairly straightforward: the oil spike was inflationary, and the Fed might not have the runway to ease into a softening labor market without risking a resurgence in price pressures. Higher U.S. rates, or at least the expectation of less accommodation, are a structural tailwind for the dollar. While German yields also moved higher, the differential between U.S. policy rates and those of other major economies widened materially. That’s a key fundamental driver behind the dollar’s recent strength.
So was this a safe-haven bid? The move doesn’t appear to be purely about safe-haven flows. The dollar’s 2.5% gain against both the euro and the yen was significant but not necessarily strong enough to suggest pure panic buying. If safe-haven demand were the dominant force, one might expect a more explosive reaction, particularly from the yen.
Yet there were signs of heightened risk aversion — Euro currency CVOL, a CME Group index that measures implied volatility in the euro, spiked over 30% after the conflict. While this was a substantial move, it came off of an 18-month low for the index, suggesting measured concern rather than an indication of panic.
