Dollar surge could be short-lived after U.S. strike on Iran

The U.S. dollar surged in early trading on Monday, benefiting from its traditional safe-haven status after U.S. military strikes on Iran — but analysts are warning the gains may be short-lived.

The dollar index was up 0.45% at one point, indicating a gain against currencies such as the

Jordan Rochester, head of FICC strategy for the EMEA region at Mizuho, also expressed some optimism when it came to the possibility of a Strait of Hormuz closure. 

“It’s a bold call but I doubt the strait of Hormuz is blocked and we avoid the $100-130pb oil levels touted by the sell side with Iranian allies such as China likely to be applying pressure to keep oil flows ongoing,” he said in a Monday morning note. “The US is also likely to have made energy infrastructure a red line attached to its support of Israel.”

However, a key indicator of safe-haven demand — the U.S. Treasury market — appears to be telling an entirely different story through its unusually muted reaction.

A global crisis typically sends investors flocking to U.S. government debt, but Danske Bank’s Kundby-Nielsen said the “impact on US Treasuries is a bit more uncertain given the significant trade deficit and tariffs combined with a potential increase in the supply of Treasuries given the soft fiscal policy”.

A global trade war is compounding these fiscal concerns.

With a July 9 deadline approaching until a reprieve on levies expires, the U.S. is threatening tariffs of up to 50% on most imports from the European Union. 

“As far as the USD goes, we’d suspect that the USD would be sinking lower if it weren’t for the War, largely because the news pertaining to US import tariffs is not particularly good, and because data from outside the US, while weak, does not point to further deterioration relative to the US,” said Thierry Wizman and Gareth Berry, Macquarie’s currency and rates strategists, in a June 20 note to clients that preceded the U.S. strike on Iran.

FX strategists from Bank of America also point out that investors are betting heavily on the decline of the U.S. dollar, which adds momentum to any downward move for the currency.

According to the BofA global fund manager survey released on June 16, fund managers currently see short-U.S. dollar as the third most crowded trade — although the survey was carried out before to the United States’ involvement in the Middle East conflict.