Dollar Surges as Iran Conflict Fears Push Won Past 1,500 for First Time in 17 Years

Global capital is rapidly fleeing risk assets amid concerns that U.S.-led military operations against Iran could drag on longer than expected. International oil and gas prices are surging, raising fears of stagflation—rising prices amid economic stagnation—as both aggregate supply and demand contract.

New York markets initially expected a swift conclusion after the first day's airstrikes eliminated Supreme Leader Ayatollah Seyyed Ali Khamenei. But signs of a prolonged conflict sent stocks tumbling. Gold and U.S. Treasury prices, which had shown strength through early this year, began falling rapidly.

Only the dollar is rebounding, driven by expectations that the Federal Reserve will return to tightening amid inflation concerns. The KOSPI plunged more than 7%, while the won-dollar exchange rate breached 1,500 won per dollar for the first time since the 2009 global financial crisis.

On March 3 local time, the Dollar Index (DXY) on the ICE Futures Exchange surged to 99.68 intraday—up sharply from 97.61 on February 27, just before the U.S. and Israel launched airstrikes. The index last closed above 100 on November 24 of last year. It had been steadily declining due to President Trump's weak-dollar policy and three consecutive rate cuts in the second half of last year.

The euro, British pound, and Australian dollar all fell approximately 1% against the surging greenback. The Korean won, particularly vulnerable due to the economy's high external dependence, breached the 1,500 level in overnight trading. On March 4, the won-dollar rate spiked to 1,506 won intraday before settling at 1,485.7 won—still 19.6 won higher than the previous day's close of 1,466.1 won.

The last time the won exceeded 1,500 per dollar was in early March 2009, when it approached 1,600 won during the global financial crisis. Late last year and early this year, the rate climbed to the 1,480 won range but was held below 1,500 by verbal intervention and policy measures from monetary authorities.

The dollar's sharp rise reflects soaring international energy prices following U.S. airstrikes on Iran. Markets judged that the Fed could shift to a tightening stance as global inflation concerns mounted. If U.S. interest rates hold steady or rise, the value of holding dollars naturally increases.

West Texas Intermediate crude for April delivery rose 4.67% to $74.56 per barrel on the New York Mercantile Exchange. Brent crude futures climbed 4.71% to $81.40 per barrel on ICE.

Iran has blockaded the Strait of Hormuz, through which 20-30% of global seaborne oil passes, and is indiscriminately attacking neighboring countries hosting U.S. military bases. The Islamic Revolutionary Guard Corps (IRGC) officially declared the strait closed, warning it would fire on any vessel attempting passage.

Tanker freight rates at Saudi Arabia's Yanbu port doubled in a single day to $28 million per vessel. Ebrahim Jabbari, advisor to the IRGC commander, warned: "The Strait of Hormuz is now closed. We will sink any ship that attempts to pass and prevent a single drop of oil from being exported, pushing international oil prices to $200 per barrel."

President Trump responded on his Truth Social platform, stating the U.S. Navy would begin escorting tankers through the Strait of Hormuz "as soon as possible if necessary." He added that he had directed the U.S. International Development Finance Corporation to provide political risk insurance and guarantees for all shipping through the Gulf region, particularly energy transport, "at very reasonable prices."

As expectations for rate cuts faded, the yield on 10-year U.S. Treasuries—a global bond market benchmark—rose approximately 0.05 percentage points intraday to above 4.10%. Rising yields indicate falling bond prices.

According to CME FedWatch, federal funds futures markets raised the probability of the Fed holding rates at 3.50-3.75% throughout the year from 7.0% to 8.8%. The probability of three 0.25-percentage-point cuts fell from 23.9% to 21.6%. Markets now see a 97.4% chance the Fed will hold rates at its March 17-18 meeting, up from 96.4%.

Even if Fed Chair nominee Kevin Warsh is confirmed by the Senate and takes office in May, expectations are spreading that he may not easily deliver the additional rate cuts President Trump has demanded.

Central banks and Wall Street experts are watching the Iran situation cautiously, signaling greater prudence in rate decisions. Philip Lane, chief economist at the European Central Bank, told the Financial Times: "The surge in energy prices puts upward pressure on prices in the short term."

Minneapolis Fed President Neel Kashkari said at a New York investment conference: "I had expected one rate cut this year would be appropriate, but the war between the U.S. and Iran has reduced that conviction." He added: "How long energy prices remain elevated will be key for inflation. Given current geopolitical events, we need to see more data."

New York markets, which closed mixed on March 2, began shaking significantly on March 3 as concerns grew about a prolonged conflict. The Dow Jones Industrial Average fell 0.83%, the S&P 500 dropped 0.94%, and the Nasdaq Composite declined 1.02%.

President Trump, in his first public remarks since the war began at a Medal of Honor ceremony at the White House, said: "I expected it would take four to five weeks, but we have the capacity to sustain it longer." In an interview with the New York Post, he added: "We can deploy ground troops if necessary." Both statements indicated readiness for a prolonged conflict.

Iran is currently conducting resistance operations using low-cost drones to deplete expensive interceptor missiles in neighboring countries.

On March 3, President Trump posted on Truth Social: "We have unlimited mid-to-high-level weapons. The Wall Street Journal article is wrong and shameful." He was refuting the Journal's report that U.S. stockpiles of air defense interceptors and sea-launched Tomahawk cruise missiles were declining, potentially limiting his options. This statement also dampened Wall Street hopes for a quick end to the conflict.

Jamie Dimon, CEO of JPMorgan, told Bloomberg: "There is complacency in the market." He expressed concern about inflation...