USD Strengthens, Oil Rally and Hormuz Risk Drive Safe Haven Demand
The US dollar strengthened on Thursday (March 12), remaining a key hedge against a renewed surge in oil prices, triggering a flight to safety as investors moved funds from riskier assets to assets considered safe in times of uncertainty.
The dollar index (DXY) rose 0.4% to 99.64 at 1:47 p.m. ET (US Eastern Time), while EUR/USD fell 0.4% to 1.1522 and GBP/USD weakened 0.4% to 1.3354. Market participants assessed that there was no strong signal that the US/Israel-Iran war would soon subside, prompting de-risking in the currency market.
The dollar's rise coincided with a surge in oil prices, which have re-surfaced above US$100 per barrel, amid concerns that a prolonged closure of the Strait of Hormuz would disrupt global energy supplies. Iranian state media quoted Iran's new leader, Mojtaba Khamenei, as stating that the Strait of Hormuz must remain closed. Tensions are also evident in reports of attacks on merchant ships around the strait, as well as Iraq and Oman's moves to close oil terminals. Although the US and IEA members have agreed to release large amounts of oil reserves, the market believes this measure is insufficient to ease supply tightness and risk premiums.
The main drivers of the dollar are inflation and interest rates: more expensive oil has the potential to revive global inflationary pressures, which could make central banks—including the Fed—more cautious about cutting interest rates. The prospect of persistently high interest rates tends to attract capital flows into dollar assets and strengthen the greenback. The dollar index has strengthened since the Iran conflict broke out, from just above 97 before the latest attack.
In Asia, regional currencies weakened broadly as the region's dependence on oil and gas imports via Hormuz increases sensitivity to energy shocks. Data-wise, the US CPI on Wednesday showed relatively stable inflation in February, but that figure does not capture the impact of the war-induced oil surge. The next focus will be the release of the PCE—the Fed's preferred inflation indicator—which has the potential to shape longer-term interest rate expectations.
Markets are monitoring developments in shipping security in Hormuz, the direction of oil prices following the strategic reserve move, and the Fed's signal via the PCE regarding whether energy inflation risks are starting to shift the monetary policy path again.
Source: Newsmaker.id
