Bank of America Securities says the U.S. dollar has again become the market's favored refuge as conflict in the Middle East unsettles financial markets and creates oil-related risks. In a note dated March 3, the bank pointed to the United States' status as a major oil producer and a traditional safe-haven currency as reasons the dollar has historically outperformed its G10 peers during oil supply shocks.
"The USD's strength does not come as a surprise," the analysts wrote, adding that historical patterns show the greenback tends to outperform in episodes of oil supply disruption.
At 09:40 ET (14:40 GMT), the Dollar Index - which measures the U.S. currency against a basket of six other currencies - traded about 1% higher at 99.300, its strongest level since December 2025.
Bank of America also pointed to derivatives market activity as confirmation of shifting investor preferences. Option flow and skew moved decisively in the dollar's favor last week as market participants positioned for a potential USD rally amid escalating tensions, the bank said.
Most notably, the bank highlighted moves in EUR/USD options: 1-month skew swung sharply toward USD call demand, becoming the most negative reading since June of last year. In addition, the bank said its trend indicators show the dollar is no longer in a downtrend versus the euro, indicating momentum has shifted away from prior USD bearishness.
Beyond the U.S. dollar, Bank of America identified the Canadian dollar as the next typical outperformer during oil supply shock episodes. As the bank observed, "As a major oil producer, Canada benefits from higher crude prices and is therefore less adversely affected by oil supply disruptions."
The bank added that Canada's currency often exhibits a higher beta to the U.S. dollar in such episodes, which contributes to outperformance both in spot returns and in option skew.
Implications for markets
- Foreign exchange markets are seeing pronounced flows into the U.S. dollar as investors price in oil-related supply risks.
- Derivatives pricing - including option skew and flow - reflects rising demand for dollar exposure, particularly against the euro.
- Energy-linked currencies, notably the Canadian dollar, can also benefit from higher crude prices and tend to show stronger spot and skew performance in these episodes.
The bank's analysis focuses on observed market behavior and option metrics during the current episode rather than forecasting future moves. It emphasizes that historical patterns have shown the dollar and, to a lesser extent, the Canadian dollar, tend to outperform during oil supply shocks.