Three forces driving the Dollar upwards

• Safe-haven demand, trade flows and shifting FOMC expectations are bolstering the DXY.
• The yen could benefit from capital repatriation.

The dollar index is approaching the highs of its 11-month range, whilst Donald Trump reports on successful negotiations with Iran. The US President has stated that Iran has met most of his 15 demands. There are rumours of a ground operation with various objectives, ranging from the capture of Kharg Island with its oil infrastructure to the seizure of 1,000 pounds of uranium belonging to Tehran.

The White House’s intentions are increasingly only heightening investor jitters, forcing them to flee to the US dollar as a safe haven. At the same time, rising oil prices are boosting demand for the greenback, as the currency benefits from higher oil prices. A third supportive factor is the shift in the Fed’s stance from imminent rate cuts to a readiness to raise rates to combat inflation.

In such conditions, macroeconomic data and monetary policy are destined to take a back seat. Bloomberg experts expect US employment to rise by 60,000 in March following a decline of 92,000 in February. Unemployment, in their view, will remain at 4.4%. However, an increasing number of FOMC officials view inflationary risks as a more pressing threat than a cooling labour market. As a result, the futures market is pricing in a 92% probability that rates will not fall in 2026, compared with just 4% before the conflict in the Middle East. 

Meanwhile, rumours of Japan’s activity in the oil market and the intensification of verbal interventions have contributed to the retreat of USDJPY, which has pulled back from the psychologically important 160 level.

Eurizon SLJ Capital believes that as the conflict escalates, the US dollar will strengthen against most currencies, but not against the yen. The yen could benefit from capital repatriation amid a widespread decline in stock indices.

Despite attempts to rise, gold remains under pressure. The precious metal has transformed from a safe-haven asset into a source of liquidity. Investors are selling it to meet margin requirements on shares and bonds, whilst central banks are selling to support their economies and stabilise national currencies.

The FxPro Analyst Team