Financial encyclopedia

Whenever geopolitical conflicts heat up, a phenomenon often occurs in the market: global funds flow into US dollar assets, but the price of gold does not necessarily rise in tandem. In fact, this phenomenon reflects the core position of the US dollar in the global financial system. 

One, global transactions rely heavily on the US dollar. 

At present, many international trade and financial transactions are denominated in US dollars, such as:
- Oil and energy trading
- Commodity markets
- Bonds issued by multinational enterprises and governments 

Therefore, the US dollar is not only the currency of the United States but also an important foundation of the global financial system. 

II. Increased Global Demand for the US Dollar during Crises 

When the market experiences turbulence, the status of the US dollar becomes even more prominent. Investors tend to reduce their holdings of high-risk assets and instead opt for more liquid assets, such as the US dollar and US Treasury bonds. 

At the same time, a large number of enterprises and financial institutions around the world also hold debts denominated in US dollars. When market pressure rises, these institutions need to obtain US dollars to repay debts or maintain liquidity, thus the demand for the US dollar often increases. 

This phenomenon has occurred many times in the past. For instance, at the beginning of the 2020 pandemic, the global financial market witnessed a "dollar shortage", with a large amount of capital flowing into dollar assets. The US Federal Reserve even had to establish a dollar swap mechanism with multiple central banks to ease the market's demand for dollar liquidity. 

III. The Safe-Haven Roles of Gold and the US Dollar Differ 

When geopolitical risks rise, gold is also often regarded as a safe-haven asset, so the market will from time to time witness a rise in the price of gold. 

However, the roles of gold and the US dollar in the financial system are not exactly the same. Gold is mainly regarded as a store of value, while the US dollar serves as both a global trade settlement currency and an important source of liquidity in the financial system. 

Therefore, during market turmoil, although both gold and the US dollar are safe-haven assets, the flow of funds may not be completely consistent. This also explains why during some periods of geopolitical conflicts, the US dollar strengthens while the price of gold does not necessarily rise simultaneously.