Dollar Rides Inflation and Iran War to Best Week in Two Months
By Aboki Forex —
The dollar just recorded its strongest week in over two months. A gauge of the greenback rose 1.2% this week. That is its best performance since the period ending March 6.
The rally came after US inflation data spooked bond markets. Two back-to-back reports showed price pressures that could push the Federal Reserve to raise interest rates within the next year. One Fed official has already said the US has “got an inflation problem.”
Money markets now expect a Fed hike this year. That is a sharp shift from a month ago when traders were betting on easier policy.
Andrew Hazlett, a foreign-exchange trader at Monex Inc, linked the dollar’s strength to two factors. “It’s a combination of some re-escalation in the Middle East, which has prompted higher oil prices again, and hotter-than-expected US inflation data,” he said. He added that even if the conflict in Iran winds down, the dollar will stay above its pre-war levels.
The dollar has been sensitive to war headlines and crude prices. But its safe-haven status and America’s position as a major oil exporter have mostly kept it supported. The greenback briefly dipped after a ceasefire was announced in early April. It has since recovered as a lasting peace deal remains out of reach.
Thierry Wizman, a strategist at Macquarie Group, said he will stay bullish on the dollar as long as the war continues. He pointed out that both the dollar and the US economy are benefiting from higher oil prices. He expects the greenback to gain against the euro and the pound.
The war in Iran has disrupted global energy markets. It has also exposed Europe’s heavy reliance on Middle Eastern oil. That has soured the outlook for European economies and stoked price growth, which has weighed on the euro.
Brent Donnelly, president of Spectra Markets, said earlier this week that it is time to short the euro against the dollar as Fed hike bets grow. On Friday, currency strategists at JPMorgan Chase turned bearish on the euro against the dollar for the first time in a year. RBC Capital Markets’ Daria Parkhomenko also sees the dollar gaining in the near term against lower-yielding currencies, especially the euro and the Swiss franc.
Valentin Marinov, head of G-10 FX research and strategy at Credit Agricole, said rising US rates could cement the dollar’s status as a high-yielding currency. “Growing US rates could cement the dollar’s position as a high-yielding currency that should gain from robust market demand for FX carry trades,” he said. He added that the dollar could also benefit from foreign inflows into US Treasuries and tech stocks.