Wall Street Turns Gloomy on the Dollar as Haven Demand Fades

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(Bloomberg) — Deutsche Bank AG and Wells Fargo & Co. are among banks declaring the dollar’s war-driven haven rally is likely over as the fragile ceasefire between the US and Iran prompts investors to seek riskier assets.

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The banks are arguing it’s time to embrace bets against the greenback, and global investors seem to be doing just that. They’ve boosted dollar hedging ratios to a two-year high, according to State Street Corp. In the options market, meanwhile, confidence in the dollar has faded, with positioning the least bullish in weeks.

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The Bloomberg Dollar Spot Index surged in March as the war roiled global markets, drawing investors to the world’s primary reserve currency, traditionally seen as an oasis during times of crisis. The greenback has surrendered most of that advance over the past week, and is almost back where it was before the fighting erupted at the end of February. 

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The upshot is that with the haven aura fading, investors are once again focusing on the headwinds that drove the dollar down 8% last year — its worst performance since 2017 — including the prospect of Federal Reserve interest-rate cuts.

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“There is clear rotation out of safe havens like the dollar back into risky assets,” Kathleen Brooks, research director at broker XTB in London, wrote in an email. “If the US-Iran conflict does come to a resolution soon, I see a longer period of weakness for the dollar ahead.”

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The Bloomberg dollar gauge is down about 1.4% since the US and Iran agreed to a truce on April 7. Risk-sensitive currencies, led by those from Scandinavia, New Zealand and Australia, are up roughly 3% versus the greenback in that period, while the S&P 500 Index has recovered to set new record highs this week. 

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Pakistan is trying to mediate an extension to the truce beyond its official expiry date next week, but the situation remains fraught. The fragility of the truce underscores the peril of getting bearish on the dollar too quickly, especially if a breakdown in talks sparks a fresh rally in oil and pushes out bets on Fed easing.

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Blockade Boost

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On Thursday, the US currency and oil rose as the Strait of Hormuz, a key route for oil supplies, remained subject to a double blockade. The backdrop of still-elevated crude prices highlights another reason for dollar strength in recent weeks — the view that the US, as an oil exporter, is insulated from energy shocks. 

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Citigroup Inc. currency analysts on Thursday said the risk-reward favored betting on dollar strength. Persistently high commodity prices will cap gains in risk assets, supporting bond yields and the dollar, they said.

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However, the relative easing in tensions has reignited the wariness toward the US currency that’s shaped conversations around it since President Donald Trump took office last year.

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At Wells Fargo, strategists recommended buying the Swedish krona versus the dollar. Deutsche Bank advised selling a broad-based measure of the US currency, seeing scope for the euro to eventually eclipse $1.20 for the first time since January, from about $1.18 now. For their part, JPMorgan Chase & Co. strategists said last week that “the dollar appears to be emerging worse-off on a medium-term basis from the conflict,” partly because of high spending on the war.