Gold-dollar dynamics: What the US ‘ashvamedha’ run and AI could mean global for investors

DXY measures the dollar’s strength against a basket of currencies. Gold, which was at $1,700 per ounce in September 2022, has more than tripled to $5,274 per ounce on 28 February. Over this period, the global de-dollarization narrative of a gradual erosion in the dollar’s use as a reserve currency gained momentum.

Globally, central banks have ramped up their gold holdings in preference over dollar assets, strengthening that story.

At the start of the Iran war, many expected gold prices to spike and DXY to barely keep up or even fall. The expectation was driven by DXY-gold dynamics during recent geopolitical stresses. The Ukraine-Russia conflict in February 2022 saw gold rise by 6%, while the dollar rose by a modest 3%. The Israel-Hamas flare-up in October 2023 saw gold rising by 9%, with the dollar remaining flat. The 2024 Israel-Iran conflict saw gold go up by 8% while the dollar fell marginally.

In the first week of the Iran war, a subtle change was observed. As of 6 March, DXY had gained 1.5% over the week, its strongest weekly performance since July 2025. However, gold prices fell by 1% . This may be an inflection point that can weaken the de-dollarization narrative.

The future trajectories of gold and the dollar are difficult to predict. However, given this month’s trends, central banks and retail investors loading up on gold investments (as well as gold loan companies) may find it worthwhile not to blindly assume a one-way gold price movement.

Central banks, the most cautious of investors, purchased only 5 tonnes of gold in January 2026 while their monthly purchases in 2025 averaged 27 tonnes.

The US ashvamedha run and dollar’s strength: According to Indian legend, an ‘ashvamedha’ exercise is literally a free-rein horse run that marks a kingdom’s domain of political influence by challenging opponents to stop it.

Historically, the world’s reserve currency has been issued by a country with the most military might and strongest domestic economy. The UK lost this status to the US over the span of two world wars.

The narrative of de-dollarization emerged in the context of a multipolar world. It may have been triggered by the stated US intent of moving away from deploying its military to geopolitical stress zones, as highlighted by the US departure from Afghanistan.

Now, the US may have unleashed a modern-day version of the ashvamedha yagya. Instead of a horse reaching new territories unobstructed, the US seems to expect its modern firepower to go unchallenged across vast regions. Its actions in Venezuela and Iran are examples. Depending on how the Iran war pans out, it may settle the polarity debate for some time.

The artificial intelligence (AI) angle: A proximate reason for the recent dollar rise may be demand for the US currency created by the war-led surge in the price of crude oil, which is priced in it. However, one should not discount the use of AI in the war to gain an upper hand.

Capital inflows into US equities have been driven by the spectacular rise in AI stocks. While AI’s potential is undeniable, it is arguable whether there are enough use cases to justify the current valuations of these stocks. In the event of an AI bubble burst, we cannot rule out a crash in US equities and subsequent dollar weakness from outflows as investments are liquidated. However, the war has given AI one of the most lucrative use cases: defence. This AI narrative is supportive of the dollar.

The Iran War-AI outcome matrix: Going forward, the dollar-gold trajectory may be driven by the interaction of the war’s outcome with the success of AI. Assets denominated in the US currency continue to be a safe haven, so knee-jerk reactions to any market crisis cause the dollar to rise. But beyond these reflexes, the dollar may weaken as the effects on the real economy come to bear. Let’s chalk out divergent scenarios to assess the dollar-gold impact. The evolving scenario may be tracked with these as guideposts.

The ‘dollar is back’ scenario: The war ends within a few weeks with the US reaffirming its military and strategic dominance. AI is seen as the outcome decider. Here, crude oil prices correct and the dollar may weaken temporarily but the price of gold could see a significant correction with the multipolarity debate resolved for the near term.

Protracted war with no clear victor: The war drags for a few months. Prolonged uncertainty and elevated energy prices will affect economies, including America’s. The dollar will gradually weaken even if the AI story remains intact. Gold will hold stable and may recover some of its shine.

Extended war with expanded fronts and an AI-story implosion: Among all the scenarios, this would be the worst case for the dollar. It would establish gold as the closest thing to a reserve currency in the short to medium term.

A war that sparks US inflation: This is a wild-card scenario. It would impact US interest rates for sure, but how global capital markets treat dollar bonds is unknown. Some things remain more powerful than AI-guided missiles.

The author is a risk management and AI consultant, and a member of the visiting faculty, IIM Ahmedabad and IIM Calcutta.