Dollar Set for Best Week in a Month as Haven Flows Offer Support

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(Bloomberg) — The dollar is heading for its best week in a month as investors return to the traditional haven amid heightened geopolitical tensions.

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The greenback sits near a three-week high reached Thursday, with demand supported by an escalating Middle East conflict and a fresh round of US tariffs. One-week options positioning turned the most dollar-positive in a month, a sign that traders are paying up for protection ahead of next week’s Federal Reserve meeting.

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Beneath the geopolitical headlines, US interest-rate volatility has re-emerged as a key driver of foreign-exchange markets. Investors have less clarity than usual on where the Federal Reserve is heading, and the resulting swings in bond markets are pushing money toward the dollar and other perceived safe assets. 

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The ICE BofA MOVE Index, a widely watched gauge of expected Treasury-market volatility, climbed to its highest level since May and is on track for its longest streak of gains since November.

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“US rate volatility is rising and moving to front of mind for the market,” said BNY strategist David Tam. “This will become a direct driver of FX performance benefiting safe-haven and funding currencies while hurting high-beta, carry currencies.”

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Intensifying conflict in the Middle East has raised the prospect of energy supply disruptions, reinforcing expectations that central banks may need to keep interest rates higher for longer. Separately, the US said it will collect duties of between 10% and 12.5% on imports from most major trading partners, the biggest step yet to rebuild President Donald Trump’s tariff wall after the Supreme Court struck down earlier measures.

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Oil is also beginning to reshape currency performance, creating a wider divide between energy exporters and importers. “The dollar is beginning to acquire some degree of a front-footed nature,” said Kamakshya Trivedi, chief FX and emerging markets strategist at Goldman Sachs Group Inc. “You are beginning to see those terms-of-trade distinctions start to play out versus the oil exporters and oil importers.”

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Markets have repriced accordingly. The yield on 10-year Treasuries touched 4.7117% Friday, the highest since mid-January, and traders now assign a one-in-three probability for a quarter-point Fed rate increase next week. 

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The dollar pared its weekly advance in early London trading Friday as some traders closed out short-term bullish bets before the weekend, though the underlying demand held.

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“The dollar continues to perform well as high energy prices raise expectations for a central bank response,” said Chris Turner, global head of markets at ING. “While we do not think the Fed will hike next week, it remains very dangerous to fight this trend and we expect the dollar to outperform.”

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—With assistance from Anna Boyne.

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