The outbreak of war in the Middle East has triggered a dramatic reversal in global markets, with the US dollar surging while previously popular trades collapse. As investors rush to de-risk portfolios amid soaring energy prices and inflation fears, Wall Street indices have weathered the turmoil better than global peers, with the S&P 500 down less than 1% this week compared to the Stoxx Europe 600's 3.5% decline.

The conflict has exposed vulnerabilities in trades that had performed well throughout 2026, particularly bets against the dollar and positions in non-US markets. Asian and European equities have suffered significant losses, with South Korea's benchmark index plunging 12% in a record one-day drop. The selling has been exacerbated by leveraged positions unwinding and investors with tight risk limits being forced to sell recent winners.

This market turmoil represents a stark reversal from recent months when global investors had been reducing exposure to US assets amid concerns about President Trump's foreign policy and AI stock valuations. The dollar's rally, up 1.3% against major trading partners this week, marks a dramatic shift from the bearish sentiment that preceded the conflict. Analysts expect this reset in exchange rates to persist even if the conflict proves short-lived, as the dollar had fallen further than justified by relative interest rate moves.