[NEW YORK] The US dollar strengthened in early trading as investors sought havens in a move to shield against mounting geopolitical risks following the US strikes on Iran.
The US currency was quoted stronger against the euro and most major foreign-exchange peers as markets opened for the week in Sydney. Traders are forecasting a drop in stocks and a jump in crude prices and gold as the bombing fuels demand for safety and angst about energy supply.
“This increased-risk environment will drive investors towards safe-haven assets,” said Ahmad Assiri, a market strategist at Pepperstone.
In another early sign of risk aversion, Bitcoin slid below US$100,000 for the first time since May and Ether sank sharply as cryptocurrencies posted broad-based declines.
Market reaction had been generally muted since Israel’s initial assault on Iran earlier this month: Even after falling for the past two weeks, the S&P 500 is only about 3 per cent below its all-time high from February. And a Bloomberg gauge of the greenback is up less than 1 per cent since the Jun 13 attack.
That’s mostly because investors have expected the conflict to be localised, with no wider impact on the global economy. But moves stand to get bigger if Iran responds to the latest developments with steps such as blocking the Strait of Hormuz, a key passage for oil and gas shipments, or attacking US forces in the region, market watchers say.
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“It all depends on how the conflict develops, and things seem to be changing by the hour,” said Evgenia Molotova, a senior investment manager at Pictet Asset Management. “The only way they take it seriously is if the Strait of Hormuz gets blocked because that will affect oil access.”
Iran has vowed to impose “everlasting consequences” for the bombing and said it reserves all options to defend its sovereignty. Meanwhile, Israel resumed its assaults, targeting military sites in Tehran and western Iran.
“This marks a turning point for markets,” said Charu Chanana, chief investment strategist at Saxo Markets in Singapore. The “question is whether US assets can still command a safe-haven premium”.
Still, the downside is likely to be limited because some market participants have been preparing for a worsening conflict. The MSCI All Country World Index has pulled back 1.5 per cent since Israel attacked Iran on Jun 13. Fund managers have reduced their stock holdings, shares are no longer overbought and hedging demand has increased, meaning a deep sell-off is less likely at these levels.
The biggest market reaction since the start of the escalation has been in oil, with Brent futures jumping 11 per cent to US$77 a barrel.
Traders are preparing for another surge in crude prices even as it’s unclear where the crisis goes from here. That rise is expected to restart on Monday, after the US assault dramatically raised the stakes in a region that accounts for a third of global oil output.
Morgan Stanley’s oil analysts said a quick resolution would allow prices to fall back to US$60 per barrel, but continued tension could leave oil in the current range. “Fundamental disruptions to the global supply of oil with a possible hit to shipments through the region would push oil prices a lot higher from here,” they said. Other analysts at the firm flagged that a sustained rise in oil could trigger a short squeeze in the US dollar, though underlying fundamentals “still suggest fading this US dollar strength”.
Already, the greenback has risen about 0.9 per cent since the conflict started, but it’s a relatively small move given the US currency’s traditional role as a haven in times of turmoil. The US currency has been battered in recent months by US President Donald Trump’s trade and fiscal policies.
“The biggest trade around at the moment is short US dollar,” said Neil Birrell, chief investment officer at Premier Miton Investors. “No one likes it. But traditionally it’s the safe currency people go to, and it might just be that this turns around the fortunes of the US dollar.”
The reaction was less straightforward in the US$29 trillion market for US Treasuries since the conflict began. Yields initially sank but the moves swiftly reversed over concern about a resurgence in inflation. US Treasuries are, overall, little changed since Jun 13, with the yield on 10-year notes rising since then by less than two basis points to close Friday at 4.38 per cent. BLOOMBERG
