The dollar took a breather on Tuesday as investors swung between hopes for a de-escalation in the U.S.-Israeli war on Iran and concerns that any such optimism could be premature.
U.S. President Donald Trump said the war could end well before the timeline he initially laid out, but threatened to escalate attacks should Tehran block oil shipments from the Strait of Hormuz.
In response, Iran’s Revolutionary Guards dismissed Trump’s remarks as “nonsense” and said the blockade would continue until attacks from the U.S. and Israel end.
However, equities advanced and oil prices retreated from over three-year highs, underscoring how eager investors were to seize on any hint of good news.
“I don’t think the market’s being too optimistic. I think what happened last week was just an over-reaction,” said Nick Kennedy, FX strategist at Lloyds.
“Trump’s not the most consistent messenger of what he intends to do but investors are assessing the outlook more practically.”
Governments could step in with oil reserve releases and the approaching midterms might also prompt Trump to moderate his approach, he added.
Energy ministers from the Group of Seven were set to discuss soaring energy prices on a call on Tuesday, while a group of European Union leaders were expected to do so later in the day, officials said.
The safe-haven dollar slipped 0.1% to $1.1645 against the euro and was 0.1% stronger at 157.49 yen. The dollar index , which measures the greenback against a basket of six peers, fell 0.2%, but rebounded from a one-week low of 98.49 earlier.
PREFERRED SAFE HAVEN
The dollar has been traders’ shelter-of-choice, given that the U.S. as a major oil producer is better positioned to withstand energy price shocks compared to other economies that rely on imports.
“Higher prices result in higher income for U.S. oil producers and exporters, and the increase in prices will also likely arrest the depreciation of the dollar that has been ongoing since Liberation Day,” said Jefferies’ chief U.S. economist Thomas Simons.
A Deutsche Bank analysis on Monday suggested larger market moves out of risky assets would only happen if oil prices were to stay at higher levels and there was a policy pivot from central banks, alongside tangible signs of a broader economic slowdown.
