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(Bloomberg) — The dollar is on track for its best month since October 2024 as war in the Middle East upends energy markets, buffets economic forecasts, and sends investors rushing to the world’s primary reserve currency.
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Buoyed by those haven flows, the Bloomberg Dollar Spot Index is up about 3% this month. The US position as the world’s largest producer of oil has also supported the currency amid a surge in global energy prices, as have fading expectations for global growth.
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“The dollar rallied as a safe haven bid on weakening global growth expectations,” said Noah Buffam, strategist at CIBC Capital Markets.
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Investors have favored the dollar since the disruption to global energy markets — particularly the shuttering of the Strait of Hormuz — highlighted Europe and Japan’s dependence on oil and natural gas imports. Traders, positioned for dollar weakness before the conflict, quickly abandoned those wagers. They now hold more than $7 billion in bullish bets in the derivatives market, the most since December.
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Some Wall Street banks that held a dim view on the dollar heading into the year — JPMorgan Chase & Co. and Goldman Sachs Group Inc. among them — are now reconsidering their stance on the US currency. However, day-to-day swings in global risk sentiment and news headlines make updating forecasts exceedingly difficult.
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Expectations that the Federal Reserve will cut interest rates this year, meanwhile, have foundered as renewed inflationary fears drive traders to reconsider. In the options market, bets on dollar gains dominate the outlook into year-end.
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What Bloomberg Intelligence Says…
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“The dollar’s haven virtues have revived since the start of the Iran war as it quickly became clear this wasn’t a local conflict with fading FX impact. Dollar bulls can lean on elevated risk aversion, though the price action has underwhelmed so far, which is consistent with our view that the US’ unpredictable geopolitical stance boosts the case for diversification strategies.”
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-Audrey Childe-Freeman and Thinh Nguyen, BI FX Strategists
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Still, other investors and market watchers, including at Invesco Ltd. and Barclays Plc, worry that the war will reignite discussions concerning a fundamental, long-term move away from US markets and the greenback, driven by the vagaries of policymaking under President Donald Trump.
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“Geopolitical risk and renewed inflation concerns pushed investors toward safe havens and reinforced interest rate differentials in favor of the US,” said Nathan Thooft, a senior portfolio manager at Manulife Investment Management. “Given much of the near-term safe haven premium is now priced in our view, we would fade the rally.”
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—With assistance from Masaki Kondo.
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(Updates dollar moves.)
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English (US)