[SINGAPORE] The US dollar’s recent bout of strength – a short-lived one – amid rising Israel-Iran tension signals that the greenback’s safe-haven status is intact. But its swift slide on news of a ceasefire on Tuesday (Jun 24) also suggests that the de-dollarisation narrative is still in play, said analysts.
Deutsche Bank’s global head of emerging markets and Asia-Pacific research, Sameer Goel, told The Business Times: “The price action last week, including in Asian currencies, in response to geopolitical risk in the Middle East supports the more traditional safe-haven appeal of the dollar…
“But I don’t think that reverses the de-risking trend in global markets to re-calibrate their unhedged exposure to the dollar,” he said.
Goel said that two concurrent dynamics are underway in markets: One is a more cyclical de-risking from the unhedged concentrated exposure to the US dollar; the second is a slower, but more structural de-dollarisation trend, in line with shifts in global trade and payment systems.
The de-risking relates more to the reduced appeal of growth/rates/fiscal exceptionalism that has underpinned the greenback’s outperformance in the last few years. It is also about finding the appropriate price – the value of the US dollar and/or yields – to continue funding the US’ large twin deficits, he said.
The economist added that de-dollarisation is more about growing alternative non-dollar pools of liquidity to fund global trade and capital market transactions.
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MUFG Bank’s senior currency analyst, Michael Wan, agreed that the shift to rebalance away from the US dollar was intact, despite “some speed bumps or detours, and beyond week-to-week market gyrations”.
“The gravitational pull is still there,” he concluded, noting that key drivers for Asian economies include significant existing overweights in US assets, greater supply chain fragmentations and longer-term fiscal concerns in the world’s largest economy.
A refuge, no less
That said, Julius Baer economist David Meier maintained that US dollar weakness since the beginning of the year is not necessarily at odds with its safe-haven characteristics.
“A country’s reserve currency status is built on a combination of preconditions including a large, stable economy, institutional strength/warranting of property rights, deep financial markets, and is protected by military strength – all of which remain intact in the US,” he said.
“Although erratic policymaking is casting doubts on its institutional strength, as long as property rights remain warranted, the safe-haven character of the US dollar should hold.”
Moody’s Analytics director and head of Asia-Pacific economics, Katrina Ell, agreed that the greenback was still an attractive haven asset.
She noted that recent heightened uncertainty due to the US’ “chaotic protectionist stance” had driven its assets to be less attractive as it was the source of the instability; then escalated Middle East tensions once again sent investors back to the greenback.
Currency moves
The US dollar index over the weekend crept up towards the key 100 threshold – a level last hit in late May – after US President Donald Trump posted on Truth Social about the “very successful air strikes” on three Iranian nuclear sites on Jun 22.
The American currency reversed its trajectory late on Monday evening, weakening after the US Federal Reserve governor teased an interest rate cut at the next policy meeting in July.
It sank further on Tuesday morning to around the 98 level as Trump announced a “complete and total” ceasefire between Israel and Iran.
In response, major East Asian and South-east Asian currencies – which have mostly logged year-to-date gains against the US dollar – first weakened over the weekend, and then reversed their losses at the start of the week.
The South Korean won, Malaysian ringgit and the Philippine peso recorded some of the largest movements against the greenback.
Julius Baer’s Meier said the earlier underperformance could be attributed to their “higher cyclicality and greater sensitivity to risk aversion”, which he noted as greater than the Asian safe-haven Singapore dollar or the offshore renminbi’s policy-driven stability.
Litmus tests
On the psychological levels of the US dollar index Meier is watching in the near to medium-term – which could signal a continuation of the safe-haven rally versus a reassertion of the de-dollarisation narrative – he flagged 97 as the most recent support level and 99 as the resistance level.
But he cautioned that defining levels is more in the realm of technical analysis than fundamental analysis.
MUFG Bank’s Wan noted: “In the very near term, I’m looking for the 99.415 level at the 50-day moving average for the US dollar index to hold for the next downtrend.”
If the greenback’s safe-haven rally still has legs, the analyst expects its strength to be accompanied by a rally in US Treasuries and/or equities.
“Conversely, if the de-dollarisation narrative is reasserting itself, I would expect dollar weakness to be combined with bond markets outside the US doing better than the US; US equities lagging the rest of the world; and/or alternative safe havens (whether perceived or otherwise) such as gold, Bitcoin, yen, franc and perhaps even the Singapore dollar, to do well.”
Policy pivot or pause?
On the Fed and regional central banks’ next moves, analysts are divided.
Moody’s Analytics’ Ell cautioned that the threat of widespread tariffs remains a dark cloud, which means a sustained energy price increase would be a body blow.
“If this conflict keeps upward pressure on energy prices, the expectation that global inflation will stay contained should be abandoned,” she said.
Julius Baer’s Meier acknowledged that higher oil prices may exacerbate upside inflation risks, but maintained that the house anticipates only a temporary spike in oil prices.
“We do not expect the conflict to escalate to the point of closing the Strait of Hormuz, leading to a significant oil crisis, (hence) the impact on inflation is likely to remain within limits,” he said.
“Consequently, we do not expect this conflict to be a factor that would delay further monetary policy easing by the Fed or other global central banks,” added Meier.
Deutsche Bank’s Goel noted the increasing signs of difference in opinion within the Federal Open Market Committee on whether the central bank should stay on the sidelines in the face of elevated uncertainty, or act more imminently to ease rates.
He said: “A weaker dollar, meanwhile, together with reduction in geopolitical tail risk as it relates to a supply-side shock to oil prices, should give more comfort and space for Asian central banks to ease monetary policy.”
