The currency shock of the Israel–Iran war

The economic fallout from the Israel–Iran war at first glance appears concentrated in familiar pressure points: rising oil prices, disrupted shipping routes, and mounting energy costs, with oil prices already climbing past $100 per barrel.

Yet across global financial markets, a second adjustment, one centered on currencies and the growing strength of the U.S. dollar, is underway. Less visible than the energy shock, this shift is already transmitting financial pressure across economies well beyond the conflict zone.

From oil shock to currency shock

Periods of geopolitical conflict in the Middle East have long produced global economic disruptions. International Monetary Fund (IMF) research on the oil crises of the 1970s shows how supply-driven price shocks fed into inflation, currency instability, and prolonged slowdowns.

Today’s conflict is following a similar trajectory, but within a more financially integrated system. Oil markets remain the initial transmission channel, particularly through the Strait of Hormuz, which carries roughly one-fifth of global oil supply, according to the U.S. Energy Information Administration.

As prices rise, however, the impact is already extending beyond energy markets. The IMF’s latest Global Markets Monitor (March 2026) shows volatility spreading across currencies and capital flows, highlighting how geopolitical shocks are quickly transmitted through financial markets.

Speaking to The Beiruter, Nassib Ghobril, Chief Economist at Byblos Bank, emphasizes that these pressures are ultimately felt through currencies and the movement of capital. Because trade, energy, and much of global debt are priced in dollars, shifts in demand quickly ripple through exchange rates and borrowing costs.

Early signs across markets

Recent market movements reflect this adjustment. Currency markets have moved in tandem with energy prices, with analysts noting that sustained oil prices above $100 are reinforcing dollar strength. At the same time, policymakers in several emerging markets are facing renewed constraints, with higher inflation expectations limiting their ability to ease monetary policy.

These pressures are most acute in countries that rely on energy imports. As Ghobril puts it, “it’s not just import-dependent economies, it’s economies that are importers of oil” that face the greatest strain, as higher energy costs and currency pressures reinforce each other.

Egypt offers a clear example. As Ghobril explains, the country is facing pressure from multiple fronts: rising energy import costs, capital outflows, and declines in key sources of foreign currency like tourism and Suez Canal traffic. “It’s a balancing act,” he says. “They have allowed the currency to depreciate… but the concern remains the inflationary impact.”

Turkey reflects the same dynamic through a more direct intervention strategy. With a wide trade deficit and reliance on external financing, volatility in global capital flows has translated into pressure on the lira. Authorities have intervened to contain this pressure, including selling roughly $8 billion in gold reserves in a single week.

“The objective,” Ghobril explains, “is to maintain the stability of the currency in order to avoid further inflationary pressures,” underscoring how central exchange rate stability has become, even at the cost of drawing down reserves.

A slower-moving but more persistent shock

Unlike oil price spikes, which can stabilize if supply conditions improve, currency adjustments tend to unfold over a longer horizon. The Journal of International Economics finds that dollar appreciation shocks are associated with sustained declines in output across affected economies, as financial conditions tighten and investment slows.

Yet the relationship between oil prices and dollar strength is not straightforward. “The exchange rate of the U.S. dollar is not originally related to oil prices,” Ghobril explains, pointing instead to factors such as U.S. trade policy, fiscal deficits, and sustained demand for the dollar.

What the current moment reflects is a convergence of forces. Rising oil prices have contributed to renewed inflationary pressures, prompting central banks to delay or reconsider rate cuts. “It seems that central banks are ready to postpone any policy rate cuts and maintain current policy rates,” Ghobril says, with some, including the European Central Bank, signaling a willingness to tighten further.

Elevanted interest rates have had direct consequences for global capital allocation. “Since gold does not bear interest,” Ghobril explains, “investors shift their funds toward higher-yielding assets, contributing to rising Treasury yields and a stronger demand for the dollar.”

The result is not a simple oil-driven currency cycle, but a broader financial adjustment shaped by interest rate expectations and global capital flows. What appears as a link between oil prices and dollar strength is, in reality, the product of multiple forces converging at once.

Beyond the immediate crisis

The visible shocks of the Israel–Iran war, airstrikes, disrupted supply routes, and rising oil prices, remain central to its global impact. But the currency adjustment now emerging suggests a broader and more enduring economic consequence.

As investors continue to reallocate toward dollar-denominated assets, the effects are being transmitted across exchange rates, inflation, and financial conditions worldwide. What began as an energy shock is evolving into a financial one. Unlike the initial disruption, its effects may persist long after oil markets stabilize.