NEW YORK: The dollar finishes its best month since July as war in the Middle East upends energy markets, buffets economic forecasts, and sends investors rushing to the world’s primary reserve currency.
Buoyed by those haven flows, the Bloomberg Dollar Spot Index was up 2.4% last month despite Tuesday’s decline. 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 favoured 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 US$7bil 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 signalled willingness to end the war in Iran even if the Strait of Hormuz remains largely closed. Oil prices declined.
“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. 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. — Bloomberg
