(Bloomberg) — The dollar strengthened against all major currencies as the deepening war in the Middle East pushed oil prices above $100 per barrel and increased demand for safe-haven assets.
Appetite for the dollar increased as crude oil markets faced the prospect of further production cuts and the US threatened to deepen conflict with Iran, negatively affecting risk appetite. Meanwhile, Iran has appointed a new leader and its armed forces have demonstrated the capacity for prolonged, high-intensity warfare.
The Bloomberg Dollar Spot Index rose 0.6% on Monday, following a 1.3% rise last week. The Swedish krona led losses among G10 currencies, followed by the Australian dollar and the euro. The South African rand was the currency that fell the most among the main emerging market currencies.
“The dollar has been seen as the ultimate safe haven due to its liquidity, as well as being boosted by rising oil prices,” said Matthew Ryan, head of market strategy at financial services firm Ebury. “We anticipate continued appreciation of the dollar as the war drags on with no immediate end in sight.”
Rising oil prices have fueled inflationary fears around the world, prompting investors to scale back bets on interest rate cuts from the Federal Reserve, which had been putting pressure on the U.S. currency. The dollar also benefits from the United States’ position as the world’s largest oil producer.
The dollar has been one of the few traditional assets that offered refuge to investors as the conflict in the Middle East roiled financial markets. US Treasury bonds, the yen, the Swiss franc and gold came under pressure, while the dollar appreciated.
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The yen depreciated again on Monday, falling around 0.4%. The Japanese currency is now trading close to levels that could spark market speculation about possible intervention by authorities.
“Japanese officials will certainly feel uncomfortable now that the dollar-yen is moving back towards 160,” said Carol Kong, strategist at Commonwealth Bank of Australia.
What Bloomberg Strategists Say
“The initial appreciation of the US dollar is large enough to show that currency traders are not willing to discriminate which currency may outperform. It is simply a search for the only safe haven that proves reliable in this crisis,” says Mark Cranfield, strategist at Markets Live.
However, positioning data corroborates the prospects for greater appreciation of the dollar.
Hedge funds are now at their least bearish on the US dollar since January, according to data from the Commodity Futures Trading Commission for the week ending March 3. They currently hold about $12.3 billion in bearish positions, compared to $18.9 billion a week ago.
“Prepare for higher near-term oil prices and greater risk aversion,” said Rodrigo Catril, strategist at National Australia Bank Ltd. That means “a stronger dollar, with energy-dependent economies — Europe, Japan — likely to suffer more than energy-independent economies like Australia,” he said.
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