Dollar Wraps Worst Month Since June as Haven Trade Unwinds

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(Bloomberg) — The US dollar is heading for its worst monthly slump since June as the promise of peace talks to end the Iran war led traders to unravel bets on the haven currency.

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The Bloomberg Dollar Spot Index has fallen 1.8% in April, with most of the drop spurred by a US-Iran ceasefire struck earlier in the month. The moves have tempered more recently after a rebound caused by a renewed spike in oil prices and speculation that the Federal Reserve may hike interest rates next year. 

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“Going forward, the dollar is likely to trade lower but remain range-bound, with declines tempered by relative US growth strength and ongoing global uncertainty,” said Nathan Thooft, a senior portfolio manager at Manulife Investment Management. 

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The ceasefire between the US and Iran has largely held up since earlier this month, despite some escalating tensions. President Donald Trump said this week he won’t lift a naval blockade of Iran’s ports until a deal addressing the country’s nuclear program is secured. Axios also reported that Trump will be briefed Thursday on military options in Iran. The greenback fell 0.7% on Thursday while Brent crude slid from a four-year high. 

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April’s losses are a U-turn from the dollar’s record rally in March. As the war upended energy markets, the dollar advanced given its haven status and the US’s position as the world’s top oil producer. 

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Interest-rate dynamics are also at play for the dollar. The US currency rose Wednesday after the Fed, in a split decision, held rates steady and hinted that the uncertain economic impact of the war could keep it from cutting down the road. Traders have added to bets of a rate-hike next year.

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Other major central banks, meanwhile, have been clearer about their willingness to raise rates sooner to fight inflation, which would boost their local currencies against the dollar. The Australian dollar and Norwegian krone have strengthened against the dollar this month, up 4.1% and 4.3% respectively, as traders price in potential hikes by the Reserve Bank of Australia and Norges Bank. 

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“The energy shock could accelerate hikes from many Group of 10 central banks,” according to Deutsche Bank AG macro strategist Tim Baker. “But the Fed is less inclined that way, so the US dollar has lost its high-yielding status.”

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Baker recommends selling the dollar against currencies that benefit from elevated commodity prices, including the Australian dollar, Norwegian krone, Brazilian real and Mexican peso. 

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Speculative traders have also trimmed bullish dollar wagers for a second week through April 21, while adding to bullish bets on the pound and Australian dollar. The Japanese yen was lagging behind peers in G-10 this month. It rose more than 1% in April, largely due to a rapid jump on Thursday that sparked speculation of intervention.