Market News

BY Ruth Carson

(Bloomberg) — The dollar’s reputation as a crisis haven is being put to the test after the US currency staged only a limited rally in response to an Israeli attack on Iran that stoked fears of a wider conflict in the Middle East.

In a departure from historic norms, the dollar (DX=F) initially slipped after Israel carried out strikes against Iran’s nuclear program sites. The greenback later mounted a tepid rally, but a Bloomberg gauge of its value remains near a three-year low. The US’s position as the world’s largest oil producer likely helped spark the mild recovery on a day when crude futures soared as much as 13%.

The dollar has come under pressure in recent months as President Donald Trump pushed ahead with his trade war and the outlook for the US economy dimmed. The popular “sell America” trade that has hammered a range of US assets from stocks to Treasuries has weighed heavily on the currency.

“The dollar should be trading much higher based on overnight events, but the tendency clearly is to always see the glass half-empty,” said Francesco Pesole, FX strategist at ING.

“It’s another testament to the loss in value of the dollar’s safe haven status,” he said.

Israel’s attack marks a major escalation in the standoff over Tehran’s atomic program. Iranian and US negotiators were set to hold a sixth round of talks in Oman on Sunday, but Trump said this week he’s less confident about the chances of a deal.

The US was “not involved” in Israel’s strikes, Secretary of State Marco Rubio said, warning Iran against targeting the country’s interests or personnel in retaliation.

Analysts said the dollar should benefit from the sharp increase in oil prices. Yet the prospect of further escalation between Israel and Iran, and the threat of a wider conflict in the region, could raise more questions about the currency’s status as a haven.

Bloomberg’s dollar index has dropped about 8% this year as Trump’s efforts to overhaul global trade chipped away at investor confidence in the potential growth of the US economy. Proposed tax legislation is expected to add trillions of dollars to the federal deficit over a decade, while America’s role in security and political alliances are also being called into question.

“The ‘safe haven’ label — for assets like the dollar and yen — rests on three pillars: economic stability, liquidity and credibility,” said Hebe Chen, an analyst at Vantage Markets in Melbourne. “This year’s dollar weakness is exposing cracks across all three.”

The dollar gauge traded 0.4% higher on Friday, trimming gains after climbing as much as 0.5% in earlier trade. Both the yen and the Swiss franc, which typically gain during bouts of risk aversion, reversed initial gains to trade lower versus the US currency. Gold, which rose to a record in April, advanced as much as 1.7%, and Treasuries edged higher.

Citigroup (C) FX strategists led by Daniel Tobon said the dollar’s limited gains against the franc and yen are a signal that traditional market dynamics remain intact.

“Should volatility continue to spike and risk asset remain under pressure, we expect G10 FX can see an extension of these traditional relationships,” Tobon wrote in a research note.

What Bloomberg Strategists Say...

“It won’t so much be about haven flows, but just about the fact that the US is the world’s largest oil producer. Given that the greenback had only just hit a fresh multi-year low, downside stops got cleaned out and the short-term market will get caught offside by a bounce, which means it may become a self-sustaining climb higher.”

Mark Cudmore, Markets Live strategist

Before the attack, Wall Street banks were reinforcing their calls that the dollar would weaken further. Paul Tudor Jones, the founder of macro hedge fund Tudor Investment Corp., said the US currency may be 10% lower a year from now as he expects to see short-term interest rates cut “dramatically” in the next year.

Wall Street Sees Deeper Rout as Dollar Nears 2023 Low

For now, the debate over the dollar’s haven status continues. Shoki Omori, chief desk strategist at Mizuho Securities Co. in Tokyo, said there has been an increase in clients querying and debating the dollar’s role in their portfolios.

“Depending on how the Trump administration communicates its stance on the attacks — for instance, by signaling future involvement — there are risks Treasuries and the dollar may face further selloffs,” said Omori.

(Adds analyst comment, details, updates prices, recasts first paragraph.)