Impact of Middle East Conflict on Global Economy
The dollar was set to log its biggest weekly rise in over a month on Friday, driven by uncertainties surrounding the raging war in the Middle East and its potential repercussions on the global economy. This has fueled an appetite for traditional safe havens, causing the dollar index to climb.
Factors Influencing Dollar Index
The conflict between Israel and Iran, which has been ongoing for a week, shows no signs of subsiding, and market participants are nervous about potential U.S. intervention in the region. The White House has announced that U.S. President Donald Trump will make a decision within the next two weeks on whether to join Israel in the war. The resultant spike in oil prices has added a new layer of inflation uncertainty for central banks across regions, which have been grappling with the potential repercussions of U.S. tariffs on their economies.
Inflation Uncertainty and Central Banks
"Rising oil prices introduce inflation uncertainty at a time when growth is weakening," said Charu Chanana, chief investment strategist at Saxo. "That makes central banks’ jobs much harder — do they ease to support growth or hold back to avoid fueling inflation? Most seem to be prioritizing growth concerns for now, assuming that crude gains may not be sustained."
Currency Movements
In early Asia trading, the euro inched up 0.16% to $1.151, while the dollar weakened against the yen by 0.17% to 145.23 per dollar. The Swiss franc was flat at 0.816 per dollar on Friday but was set for its largest weekly drop since mid-April after the country’s central bank lowered borrowing costs. Currencies positively correlated to risk sentiment, such as the Australian and New Zealand dollars, were steady, while sterling was little changed at $1.34.
Interest Rates and Currency Impact
The Federal Reserve earlier this week stuck with its forecast of two interest rate cuts this year, but Chair Jerome Powell cautioned against giving that view too much weight. Analysts saw the central bank’s delivery as a ‘hawkish tilt’ further underpinning the greenback’s gains this week. Investors were, however, taken aback by an unexpected 25 basis point interest rate cut by Norges bank, and the krone is down by more than 1% against the dollar this week.
Geopolitical Tensions and Tariffs
Though geopolitical tensions were the main market focus this week, concerns about tariffs and the impact they may have on costs, corporate margins, and overall growth are ever-present. These concerns have weighed on the dollar, which is down about 9% this year. Trump’s early July tariff deadline looms, and sources said that European officials are increasingly resigned to a 10% rate on "reciprocal" tariffs being the baseline in any trade deal between the U.S. and the EU.
Conclusion
In conclusion, the dollar’s rise is largely attributed to the ongoing conflict in the Middle East and its potential impact on the global economy. The spike in oil prices has added to inflation uncertainty, making it challenging for central banks to make decisions on interest rates. As geopolitical tensions and tariff concerns continue to weigh on the market, it remains to be seen how the dollar will perform in the coming weeks. The offshore yuan was little changed at 7.185 after China kept benchmark lending rates unchanged as expected, adding to the complexity of the current economic landscape.
