The dollar is rising against the backdrop of the US war with Iran. And here's why
The dollar is rising amid the escalating conflict in the Middle East, as investors look for more reliable assets, and oil prices rise due to geopolitical risks. Other currencies, including the pound, yen and yuan, weakened at the same time. What other reasons are driving the growth of the dollar — in the material of Izvestia.
Connection with oil
• Demand for the dollar has increased due to rising tensions in the Middle East and the risk of a widening conflict between the United States, Israel and Iran. In such a situation, investors are more likely to switch to more reliable assets, including the dollar.
• Other currencies weakened at the same time. The British pound has noticeably fallen in price in recent days and has approached its lows in about a month and a half. The Japanese yen also lost some of its value against the dollar at the beginning of the week. The Chinese yuan, which strengthened at the end of February, is now gradually returning to previous levels and is slightly declining again.
• After the escalation of the conflict in the Middle East, the cost of oil began to increase rapidly. This situation can spur inflation, especially in the United States, where the price of fuel significantly affects consumer spending. But in the short term, this factor, on the contrary, supported the US currency: market participants began to buy assets denominated in dollars more often.
• The markets pay special attention to the situation around the Strait of Hormuz. About a fifth of the world's oil trade passes through this route. A significant share of supplies goes to Japan, China, India and South Korea, which are heavily dependent on fuel imports. Due to threats from Iran, the flow of ships in the region has decreased. Nevertheless, a number of analysts suggest that the situation may become clearer within three weeks: either negotiations will begin, or the forces trying to block the strait will be neutralized.
• The United States remains a major producer of oil and gas. Therefore, with rising energy prices, their economies look more stable than those of countries that depend on imports of raw materials, for example, in Europe or Asia.
A reliable asset
• In addition, the dollar is traditionally perceived as a "safe haven" in times of instability. When geopolitical risks increase, some of the funds leave emerging economies and move to the American market. Because of this, the demand for the dollar is increasing. Additional support is provided by rising yields on US government bonds, which makes them more attractive to investors.
• According to analysts, the dollar may gradually strengthen in the coming months. In the short term, the exchange rate can approach around 80 rubles, and by the end of the year it can rise even higher. Therefore, some experts recommend keeping part of your savings in foreign currency or using instruments related to foreign assets to diversify your savings. At the same time, experts consider it a dubious idea to buy a currency just "just in case": commissions and restrictions can reduce the potential benefit.
• The consequences of the Middle East conflict may be ambiguous for the ruble. Although high oil usually supports the Russian currency, it is now under pressure from discounts on domestic raw materials and restrictions due to sanctions. If the war drags on, some analysts expect the dollar to rise above 100 rubles.
Bond yields
• Global stock markets went down at the beginning of the week. Investors were alarmed by the military events in the Middle East. At the same time, oil and other energy prices rose sharply, which increased concerns about a possible acceleration of inflation. If commodity prices continue to rise, central banks may keep interest rates high for longer.
• Against this background, the yield on US government bonds is growing, as forecasts for lower interest rates are postponed to a later period. All together, this supports the dollar and helps it maintain a strong position in the global foreign exchange market.
• The Federal Reserve system adheres to a strict policy, and inflationary risks remain, the dollar will continue to attract investors' funds. A weakening of this trend is possible only with a reduction in tensions in the Middle East, falling oil prices and a shift by the regulator to stimulate the economy, but such a scenario is unlikely so far. In conditions of global instability, market participants are more likely to choose the dollar as a protective asset.
• The dollar is still the main global currency: more than half of international settlements take place through it. Theoretically, over time, another currency, such as the Chinese yuan, may take its position, but no major changes are expected in the global financial system in the coming years. The US economy is considered more stable, so part of the capital is moving to American instruments, although in recent years investors have also been using gold more often as a protective asset.
• The United States has also increased its influence in Venezuela, which gives it more control over global energy resources. However, the market remains unstable: the dollar exchange rate can either fall or rise. Previously, the prices of gold, oil, and bitcoin were too high, so some of the money will be redistributed back into U.S. currencies and stocks. This is due to the fact that the United States and its allies have a real chance of successful actions in the Middle East that will bring profits to investors.
When writing the material, Izvestia talked and took into account the opinions of:
financial advisor and founder of Rodin.Alexey Rodin's Capital;
economist Andrey Barkhot;
Ilya Rusyaev's business consultant.
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