Buoyed by those haven flows, the Bloomberg Dollar Spot Index is up 2.6% this month even as Tuesday’s decline pared gains. The US position as the world’s largest producer of oil has also supported the currency amid a surge in global energy prices, as have fading expectations for global growth.
“The dollar rallied as a safe haven bid on weakening global growth expectations,” said Noah Buffam, strategist at CIBC Capital Markets.
Investors have favored the dollar since the disruption to global energy markets — particularly the shuttering of the Strait of Hormuz — highlighted Europe and Japan’s dependence on oil and natural gas imports. Traders, positioned for dollar weakness before the conflict, quickly abandoned those wagers. They now hold more than $7 billion in bullish bets in the derivatives market, the most since December.
The dollar index weakened on Tuesday after five days of advances as President Donald Trump had signaled willingness to end the war in Iran even if the Strait of Hormuz remains largely closed. Oil prices wavered.
“Markets are thinking it may be ‘real’ this time,” said Andrew Hazlett, a foreign-exchange trader at Monex Inc. about Trump comments. The “de-escalation hopes” are weighing on the greenback, he said.
Some Wall Street banks that held a dim view on the dollar heading into the year — JPMorgan Chase & Co. and Goldman Sachs Group Inc. among them — are now reconsidering their stance on the US currency. However, day-to-day swings in global risk sentiment and news headlines make updating forecasts exceedingly difficult.
Expectations that the Federal Reserve will cut interest rates this year, meanwhile, have foundered as renewed inflationary fears drive traders to reconsider.
What Bloomberg Strategists say…
“The dollar has outperformed all major peers, buoyed by haven flows as risk sentiment wavered and the Fed outlook was repriced more hawkishly — cushioning the blow from equities. While key drivers of diversification away from the US currency, including Trump’s erratic policymaking, remain intact, improved protection from staying unhedged may temporarily slow a major headwind for the dollar.”
— Tatiana Darie, Macro Strategist, Markets Live. For the full analysis, click here.
Still, other investors and market watchers, including at Invesco Ltd. and Barclays Plc, worry that the war will reignite discussions concerning a fundamental, long-term move away from US markets and the greenback, driven by the vagaries of policymaking under Trump.
“Geopolitical risk and renewed inflation concerns pushed investors toward safe havens and reinforced interest rate differentials in favor of the US,” said Nathan Thooft, a senior portfolio manager at Manulife Investment Management. “Given much of the near-term safe haven premium is now priced in our view, we would fade the rally.”
