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The Dollar never lost its safe-haven status. Keep an eye on oil.
Sure, the Dollar is under pressure as markets downgrade their view on the U.S. economy in 2025, but it remains a global safe haven as unfolding events confirm.
The Dollar is bid after Israel's air force launched a major attack on Iran early on Friday morning, striking Iran's nuclear facilities and leaders.
General Hossein Salami, the head of Iran’s Islamic Revolutionary Guard Corps, and Mohammed Bagheri, the chief of staff of Iran’s armed forces, were among those killed.
Above: GBP/USD hit a two-year high, then dropped sharply as news of Isralie attacks filtered through.
Ayatollah Ali Khamenei, Iran’s supreme leader, said Israel will receive "harsh punishment" for its attacks. Iran has since launched around 100 drones against Israel in response.
If the Greenback's safe-haven status was ever in doubt, it won't be now: it has risen sharply as investors respond to news that Israel attacked key Iranian nuclear facilities and leadership. Iran has already responded.
"The increase in the USD gives weight to our view that the USD still carries its safe haven status despite some of the trust being eroded in recent months by President Trump’s erratic policy making," says Kristina Clifton, FX strategist at Commonwealth Bank.
Oil and gold are up, stocks are down and high-beta currencies such as the AUD and NZD are struggling. The Pound to Dollar exchange rate dropped to 1.3535 from a fresh two-year high at 1.3631 (down 0.56% on the day). The Pound is also lower against the Euro.
The problem for a lot of currencies is that oil price: as oil prices rise, so too does the USD as oil is denominated in USDs.
FX markets could therefore become increasingly sensitive to oil unless prices fall back soon. Commonwealth Bank's Commodities Strategist, Vivek Dhar, says a significant escalation of tension in the region would put $US80/bbl on the table for Brent futures in the near term.
This would mean USD must appreciate sharply. "Higher oil prices typically support USD because the US is a net energy exporter," explains Clifton.
Amarpreet Singh, a commodities specialist at Barclays, warns oil can go a lot higher from here:
"Oil markets have been alarmed by reports of Israeli attacks on Iranian nuclear and ballistic missiles infrastructure. Despite the ~10/b move higher in prices over the past three days, the worst case outcome is far from being in the price, in our view."
Above: Brent crude oil prices jump.
Israel did not hit any of Iran's oil facilities, which would suggest a strong influence from the U.S., as successive U.S. presidents simply can't tolerate higher oil prices on the domestic scene.
"So far, these attacks have had no effect on oil market fundamentals but the risk of that eventuality has obviously increased," says Singh. "In a worst-case scenario, the conflict could expand to other key oil and gas producers in the region, and shipping."
The analyst says even a potential 1 mb/d drop in Iranian production is likely not fully reflected in the price yet, let alone an escalation that could involve disruption to energy flows through the Strait of Hormuz.
The hope now is that the U.S. will lead a strong diplomatic push to end the burgeoning conflict, which is to be expected as President Trump fancies himself as a bringer of peace.
The weekend will certainly see concerted behind-the-scenes pushes for peace.
If successful, Friday's moves will be rapidly reversed on Monday, and the Dollar will be back on the depreciation path.
"We have been confronted with a similar situation a few times since October 2023, and on each one of those occasions, cool heads have prevailed," says Singh.