The U.S. dollar finally rallied on Friday — after trading around a three-year low the previous day — as investors moved into safe-haven assets following a series of Israeli airstrikes on Iran.

The scale of the attack, which marks a major escalation of conflict in the region, took markets by surprise, pushing up the price of the dollar and other assets thought to offer protection in times of heightened volatility.

The dollar index, which measures the greenback against a basket of major peers, was last seen 0.5% higher on Friday morning, trading around 98.40.

Israel Prime Minister Benjamin Netanyahu said his country had launched a “targeted military operation” against Iran’s nuclear and ballistic missile program. Iran said it launched around 100 drones targeting Israel in retaliation.

“This operation will continue for as many days as it takes to remove this threat,” Netanyahu said.

U.S. Secretary of State Marco Rubio said the attack on Israel was “unilateral” and made without U.S. support. “We are not involved in strikes against Iran and our top priority is protecting American forces in the region,” Rubio said in a statement.

The dollar’s role as a safe-haven trade was reaffirmed by its rise against both the Swiss franc and Japanese yen — both usually considered safe-haven assets — by 0.33% and 0.5%, respectively. Investors flee to safe-haven assets during times of uncertainty to protect their money from volatility and find stability when risk assets tumble.

ING currency strategists said news of the strikes had offered “the oversold and undervalued dollar a catalyst for a rebound.”

However, they noted that, in normal circumstances, they would have expected the dollar’s rebound to be even larger off the back of a “negative shock” in stocks and bonds.

“But USD’s traditional correlations have disappeared of late, and it’s likely that the 1.5% drop in S&P 500 futures is doing more to cap gains,” they added in a note.

Looking ahead, the ING strategists said the depth and length of the Middle East conflict — and its impact on oil prices — were what investors were watching.

“The risks now point more definitively towards a prolonged period of tension, in contrast to recent episodes. And we think this could continue to take some pressure off the dollar,” they wrote.

Prior to the strikes, it seemed like nothing could stem the dollar’s slide, which had been exacerbated by policy uncertainty sparked by the Trump administration. Expectations of sooner-rather-than-later interest rate reductions by the Federal Reserve were also a key driver of dollar weakness, as rate cuts push a currency lower.

On Thursday, the dollar index hit its lowest level since late March 2022.

It comes against a backdrop of widespread shorting of the U.S. dollar — with investors betting the currency is set to fall further. A survey by Bank of America, published Friday, showed that although dollar shorts are considered the most crowded trade, “conviction in short USD remains largely intact.”

Gold — another classic safe-haven asset — hit an almost two-month high on news of the strikes, although pared some gains as the morning progressed. Spot prices of the metal were up 1.3% at $3,426.31. Gold futures for August delivery were 1.3% higher at $3,445.4.

“The news has led to significant fears about an escalation and a wider regional conflict,” Deutsche Bank strategists said of the Israeli strike in a note early Friday. “The effects of the attack have cascaded across global markets, with a strong risk-off move for several asset classes.”

Some of the early market reaction had pared back somewhat by mid-morning London time, however, with Rabobank economist noting that it was looking “really quite restrained.”

U.S. Treasury prices rose earlier in the morning, pushing yields lower. Yields on the 30-year, 10-year and 2-year Treasury notes were mostly flat later in the day, however.

European stocks were trading lower, meanwhile, with U.S. stock futures also falling.

The most dramatic market reaction was seen in oil, as investors worried about retaliation from Iran and potential oil supply disruption. Crude futures jumped as much as 13% following the airstrike, but came off those highs as the morning progressed.