The US dollar skimmed six-week lows yesterday, having surrendered almost all the gains made since the Iran war erupted, as signs of another round of talks between Washington and Tehran lifted risk appetite.
The euro, which has recovered its war-driven losses, was down 0.1 per cent at $1.177, near its highest since March 2. Sterling was also down modestly at $1.355.
The dollar index, which measures the US currency against six others, is back to where it was at the end of February, having risen by as much as 3pc at one point in early March.
Although talks in Islamabad last weekend failed to produce a breakthrough investors are clinging to hopes that diplomacy could yet deliver a resolution.
The dollar emerged as the key beneficiary of safe-haven flows in March, but optimism around a ceasefire and a possible resolution has pushed it down nearly 2pc this month against other major currencies.
Given the extreme uncertainty of the situation, MUFG currency strategist Lee Hardman said it may be too soon to declare the dollar’s safe-haven appeal to be over.
“In the very near term, we are a bit cautious about chasing the dollar further lower, given that the market appears kind of optimistic now that the worst is behind and things might get back to normal more quickly than is likely,” Hardman said.
“I still think there’s a risk that the market’s underestimating the energy price shock, that it’s likely to hit the global economy,” he said. Investor focus is squarely on the extent of the damage to the global economy from the energy shock, not least as prices for physical crude are above $140 a barrel, even as futures are below $100 again. The International Monetary Fund cut its growth outlook due to the energy price spike but said the world was already drifting toward a more adverse scenario with much-weaker growth.
Under the IMF’s worst-case outlook, the global economy teeters on the brink of recession, with oil prices averaging $110 a barrel in 2026.
The Japanese yen, which is still well below pre-war levels, given Japan’s exposure to imported energy inflation, was 0.14pc weaker at 158.95 against the dollar on the day.
The surge in oil and natural gas prices has prompted traders to price in the possibility of the European Central Bank and the Bank of England raising rates this year to temper inflation, while bringing even one rate cut from the Federal Reserve into doubt.
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