According to Barclays, during times of turmoil and surging oil prices, global investors typically view the US dollar as a stabilizing force. However, the current administration’s erratic mood and the unstable tech industry have put pressure on the dollar’s rise.
The Bloomberg dollar index has risen by nearly 2% since the United States and Israel launched air strikes on Iran more than three weeks ago. But given the significant changes in the real interest rate differential between the dollar and major currencies, especially the euro, this increase is lower than expected.
For Barclays strategists, this proves that the dollar premium – the extra return traders need to hold US cash – has largely vanished since Donald Trump’s president shook markets with a full-scale tariff statement nearly a year ago.
Investors holding long positions in the US dollar are constantly exposed to the risk of information unfavorable to the dollar’s performance on White House social media, and this risk is almost impossible to predict, a team led by Themistoklis Fiotakis and Lefteris Farmakis wrote on Tuesday. Such events can have a significant impact on profits and losses immediately, meaning that investors may need to demand a higher return from their long dollar positions to make such risks worth taking.
Investors expect that the Middle East conflict and the soaring energy prices will support the US dollar exchange rate. As the United States is the world’s largest oil producer and the US dollar plays a significant role as a key currency in global crude oil trade, the safe-haven currency, the US dollar, is closely related to oil prices. However, an analysis by Barclays Bank shows that the US dollar premium has hardly changed over the past year.
Any factor that boosts the US dollar is unlikely to be sustainable, and due to the US-centric nature of events, the dollar’s safe-haven status may gradually weaken. As the market refocuses on the fiscal sustainability of the US economy, especially under the hawkish stance of the Federal Reserve, the theme of de-dollarization may resurface.
The Barclays team said: “A balanced view on the dollar’s movement needs to take into account this premium trend. Recent experience shows that even if geopolitical tensions eventually stabilize, a certain degree of premium will still exist, which means the dollar may weaken in the short term.”
Goldman Sachs foreign exchange strategists said that if currency and interest rate markets shift their focus from inflationary consequences of the conflict to concerns over economic growth, the dollar’s rally since the start of the Iran war could slow down.
Isabella Rosenberg of Goldman Sachs wrote in a report on Tuesday: “Although the market has largely regarded the oil shock as an inflation and terms-of-trade event, a shift towards greater downside growth risks could curb the broad appreciation of the dollar against G10 currencies.”
Analysts said that amid the stock market-led tightening policy due to concerns over economic growth, the Japanese yen and the Swiss franc, as safe-haven currencies, have seen the biggest gains against the US dollar.
