BofA says the drivers of the U.S. dollar’s recent strength matter. Here’s why.

Investing.com - The safe-haven appeal of the U.S. dollar has been burnished by a spike in oil prices caused by the escalating conflict in Iran, rather than a loss of faith in the American government, according to analysts at BofA Securities.

At 06:38 ET (11:38 GMT) on Thursday, the Dollar Index, which tracks the greenback against a basket of six other currencies, had gained 0.3% to 90.01, hovering around a three-month high hit earlier this week.

In a note to clients, the BofA strategists including Adarsh Sinha and Alex Cohen suggested that the U.S. dollar has strengthened even versus gold, a traditional bastion of safety during times of crisis.

Oil and natural gas prices have surged following joint U.S. and Israeli strikes against Iran last weekend. The conflict, which has now widened to include strikes by both sides on countries across the Middle East, has led to a choking off of crucial energy supplies which typically traverse the vital Strait of Hormuz waterway.

Roughly a fifth of the world's oil and liquefied natural gas pass through the strait south of Iran, making it a crucial chokepoint for global energy supplies. Traffic has built up on either side of the narrow geographic passageway, although President Donald Trump has suggested that the U.S. could insure and escort vessels in an attempt to relieve the bottleneck.

The analysts added that because of the oil price shock, investors are not changing how they invest in the U.S. or looking for ways to protect against U.S. policy missteps.

"The return of traditional 'risk off' (versus debasement) price action is consistent with the underlying driver -- oil shocks -- not impacting U.S. capital allocation/hedging decisions," they wrote.

They noted that this differs from previous instances, such as the imposition of Trump's sweeping trade tariffs or threats to take over Greenland, which contributed to investors moving out of the dollar.

Against this backdrop, the dollar might stay strong in the first quarter due to resilient economic data, but the analysts expect it to eventually fall in value later on.