Iran Conflict: US Dollar Regains Status As Safe Haven

(MENAFN- Khaleej Times) The US dollar has regained its safe haven status since the Iran war began.

In this time of global uncertainty, other popular safe havens – gold and the Swiss franc – have just not held up.

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The dollar is reclaiming its traditional mantle as the financial refuge of choice in turbulent times. After a year of surprising weakness, the dollar has reversed course and is rising against most other currencies.

“Many people had questioned the dollar’s role as a safe haven, and its performance in the war has now resuscitated it,” said Marc Chandler, chief market strategist at Bannockburn Global Forex.

The dollar’s decline last year had been driven by uncertainty around US tariff policies as well as expectations of lower US interest rates. Investors had diversified away from the dollar and into other currencies and assets, including gold.

Now, with rising oil prices, higher inflation supports the dollar since the Federal Reserve would be unlikely to cut US interest rates.

Gold has been on a roller coaster. As the dollar declined, gold rose but once the US and Israel attacked Iran, it began its decline. Gold is now down 15 per cent amid talk that some central banks are sellers, Chandler said. Strategists also say the trade into gold was overcrowded and worried investors could see it as a place to take profits.

“This month, all of the G10 currencies are down more than 1 per cent,” said Chandler. The Swiss franc was down about 3.5 per cent in the month since the US and Israel attacked Iran.

The best performer of the G10 currencies against the dollar has been the British pound, which lost 1.4 per cent in the month.“It’s partly because we’ve seen the biggest swing in interest rate expectations in the UK,” he said.

The next best performers were the Canadian dollar, down 1.7 per cent and the Norwegian krone, down by 2.3 per cent against the dollar. “They’re obviously more dependent on oil and gas exports,” Chandler said, adding that higher oil prices help them for now.

When the dollar was falling in the past year, the trend had been a boost to other markets and economies. For emerging markets, it was especially positive. Now currencies in those markets, including some strong performers, have fallen hard against the dollar in the past month.

Chandler said the Columbian peso, however, is bucking that trend and moving higher. It is the best performing currency.

“There are conservatives that look like they gained some ground in the polls there, and Columbia is also an oil exporter,” said Chandler. Columbia’s peso was up 2.3 per cent for the month, and the Argentine peso is right behind it, also up about 1.8 per cent.

The third and fourth best performers in EM are the Hong Kong dollar and the Chinese renminbi.

“The Chinese RMB is only down 0.7 per cent. I think partly the strength of China is remarkable. Earlier this month, while the war was going on they set the dollar’s fixing at a new multi-year low,” Chandler said. Countries with weaker currencies can have an advantage in global trade.“All these other currencies are falling. China could have let the RMB fall too, but it hasn’t.”

China is the biggest importer of oil in the world, but Chandler noted that it had stockpiled crude.

The worst performer in EM has been the South Africa rand, down nearly 7 per cent.

“Even though many people think Russia comes out ahead because the US lifted sanctions on its oil,” he said. The Russian ruble is off about 5.6 per cent, the second worst performer.

The dollar index – DXY - has risen more than 2.5 per cent since the war began. The index represents a basket of currencies that are heavily weighted to the euro. Some strategists say the position of the US as a major energy producer and exporter has also been supportive for the dollar.

Investors can play dollar direction via exchange traded funds. The Invesco DB US Dollar Index Bullish Fund (UUP) is a bet on a rising dollar, while the Invesco DB US Dollar Index Bearish Fund (UDN) is for investors who expect a lower dollar. There are also other currency ETFs.

Another way to invest in dollars is to buy short-term Treasury bills. They come in maturities of one-month, three-months, six-months and 12-months.

For investors uncertain about whether to put new money to work in markets, cash is an alternative.

“I think if you’re putting money in money market funds or shorter-term Treasury bills, it’ s a good place to hide. You know what you’re getting back,” said John Briggs, head of US rate strategy at Natixis Corporate & Investment Banking.

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