So much for de-dollarization. With conflict spreading in the Middle East, it’s the U.S. dollar that is the star in currency markets, reasserting its status as a haven.
The DXY dollar index—which tracks the value of the currency against a basket of major peers—was up 0.4% at 98.79 early Tuesday. While other assets boosted by the fighting in Iran and elsewhere have given up their initial gains, the greenback remains at its highest levels in more than a month.
“The move was a strong indication that the U.S. dollar remains the go-to safe-haven currency for investors, and that those calling for further weakness due to de-dollarization may be a bit early,” wrote David Morrison, senior market analyst at Trade Nation in a research note.
Notably the dollar registered strong gains against the euro and yen—two currencies that have been mentioned frequently as alternatives for investors disquieted by the actions of the Trump administration and their implications for the U.S. currency. The dollar has appreciated around 1% against both the euro and yen since the start of the conflict in Iran.
While the recent moves still leave the dollar down 6.5% over the past 12 months when measured on the DXY index, it’s a reminder that American assets still have their benefits.
The particular appeal of the dollar right now comes from the U.S.’s relative lack of sensitivity to oil prices due to its plentiful domestic energy reserves. Meanwhile, the fighting has caused particular disruption in markets for liquefied natural gas, a commodity vital for energy supply in much of Europe and Asia.
“For FX markets, this continues to look like a tale of the haves and the have-nots when it comes to energy independence,” ING analyst Chris Turner wrote in a research note. “The dollar looks the best currency to take advantage of this energy shock…but other big natural gas exporters like Australia and Norway are seeing their currencies outperform too.”
So long as potential disruption to oil remains the main economic story coming out of the conflict, expect the dollar to do well and de-dollarization to remain on hold.
Write to Adam Clark at adam.clark@barrons.com