Goldman Says Iran War Dollar Surge Weighed on Treasury Demand

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(Bloomberg) — A stronger dollar during the first month of the US-Iran conflict spurred foreign official institutions to sell Treasuries, according to Goldman Sachs.

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The US currency is “one of the most meaningful drivers of valuation-adjusted foreign official Treasury demand,” Goldman strategist Isabella Rosenberg wrote in a note Wednesday. Foreign holdings of Treasuries fell in March from a record high, while the Bloomberg Dollar Spot Index climbed 2.4%, its strongest monthly gain since July.

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The shifts, Rosenberg noted, appear to come as some foreign governments focus on supporting their local currencies and mitigating capital outflows amid the war. It’s likely a temporary pattern that isn’t indicative of a structural shift in demand for Treasuries, she said.

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After US and Israeli strikes on Iran began in late February, the dollar benefited from demand for traditional haven assets, as well as from the US’s position as the world’s largest oil producer. The conflict disrupted energy markets and fueled global inflation concerns, putting pressure on economies that rely heavily on imported energy.

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Currencies including the Indian rupee, South Korean won, Turkish lira and Japanese yen were among the 10 worst performers versus the dollar out of the 31 major currencies tracked by Bloomberg since the war started.

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“Central banks’ defense of currency arrangements typically signals a strong intention to remain tied to the dollar and maintain ownership of Treasuries in the long run,” Rosenberg wrote. “Assuming the conflict ends, we would expect a return to the dollar weakening trend to provide a modest tailwind to foreign official institutions’ Treasury demand, as it had started to do once again pre-conflict.”

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