Introduction to the US Dollar’s Status
The US dollar’s recent bout of strength amid rising Israel-Iran tension signals that its safe-haven status is intact. However, its swift slide on news of a ceasefire also suggests that the de-dollarisation narrative is still in play, according to analysts. Deutsche Bank’s global head of emerging markets and Asia-Pacific research, Sameer Goel, stated that the price action in response to geopolitical risk in the Middle East supports the traditional safe-haven appeal of the dollar.
De-Risking and De-Dollarisation Trends
Goel explained that two concurrent dynamics are underway in markets: a more cyclical de-risking from the unhedged concentrated exposure to the US dollar, and 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. De-dollarisation, on the other hand, is about growing alternative non-dollar pools of liquidity to fund global trade and capital market transactions.
The US Dollar as a Safe-Haven Asset
Julius Baer economist David Meier maintained that the US dollar’s 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, deep financial markets, and military strength, all of which remain intact in the US. Moody’s Analytics director and head of Asia-Pacific economics, Katrina Ell, agreed that the greenback is still an attractive haven asset.
Currency Moves and Market Reactions
The US dollar index crept up towards the key 100 threshold after US President Donald Trump posted about the "very successful air strikes" on three Iranian nuclear sites. 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. 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.
Litmus Tests for the US Dollar
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. MUFG Bank’s senior currency analyst, Michael Wan, noted that the 99.415 level at the 50-day moving average for the US dollar index is crucial for the next downtrend.
Policy Pivot or Pause?
Analysts are divided on the Fed and regional central banks’ next moves. 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. 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.
Conclusion
In conclusion, the US dollar’s safe-haven status remains intact, but the de-dollarisation narrative is still in play. The currency’s strength is being tested by various factors, including geopolitical tensions, interest rate cuts, and oil price fluctuations. As the global economy continues to evolve, it is essential to monitor the US dollar’s movements and the trends of de-risking and de-dollarisation. The future of the US dollar as a reserve currency will depend on various factors, including the US economy’s stability, institutional strength, and military power.
