Goldman: Iran War Dollar Surge Weighed on Foreign Treasury Demand in Conflict's First Month

The Quick Take

• A stronger US dollar during the first month of the US-Iran conflict caused foreign official institutions to reduce US Treasury purchases, according to Goldman Sachs
• Goldman's analysis links the dollar surge — a typical safe-haven response to geopolitical shock — to reduced foreign demand for Treasuries, creating a demand headwind
• The finding has implications for US fiscal dynamics if the Iran conflict remains prolonged and the dollar stays elevated

Goldman Sachs has identified a specific mechanism by which the US-Iran conflict has affected US Treasury demand: the dollar's safe-haven surge during the conflict's first month led foreign official institutions (central banks, sovereign wealth funds) to sell Treasuries to support their own currencies, creating a net demand reduction in the $27 trillion US government bond market. This counter-intuitive dynamic — where the same geopolitical shock that makes Treasuries 'safer' also drives their foreign sellers — is a recurring feature of geopolitical crises.

The Goldman finding highlights a structural tension in US fiscal dynamics: dollar strength, which typically signals confidence in US assets, can simultaneously suppress foreign demand for the very Treasuries that fund US deficits. If the Iran conflict extends, the cumulative foreign official selling could push 10-year Treasury yields higher, compressing equity multiples and tightening financial conditions more broadly. Canadian fixed-income markets are directly exposed as major holders of US dollar debt.

Watch for the monthly TIC (Treasury International Capital) data release from the US Treasury, which quantifies foreign official holdings changes in detail. The macro variable: dollar index trajectory — if DXY retreats from current elevated levels as the Iran situation de-escalates, the foreign selling pressure on Treasuries should reverse, providing a tailwind for bond prices.

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