Written by Dollar adds to gains as Iran war rages
The US dollar pulled back against all its major counterparts on Wednesday, with investors scaling back some of their safe-haven positions after a New York Times report said that Iran’s Ministry of Intelligence had communicated to the US Central Intelligence Agency its willingness to sit at the negotiating table for ending the war.
However, the greenback rebounded again today after Iran launched a wave of missiles at Israel, dragging the war into its sixth day.
With Iran deciding to close the Strait of Hormuz, through which around 20% of global oil supply flows, oil prices skyrocketed, gaining around 22% since the beginning of the war. That sparked fears of a resurgence in inflation, prompting investors to scale back their Fed rate cut bets. According to Fed funds futures, investors are now penciling in only 41bps worth of rate cuts by the end of the year, with a first quarter-point reduction nearly fully priced in for September, and a second seen in June 2027.
The better-than-expected ADP report and the ISM services PMI for February may have also weighed on rate cut expectations. The ADP report showed that private payrolls increased by the most in seven months, while the ISM PMI rallied to more than a 3-1/2-year high.
With the war still raging, a strong NFP report tomorrow could prompt more investors to question whether a second rate cut may be needed this year, especially after the minutes of the latest FOMC decision revealed that some policymakers were open to discussing rate hikes if inflation remains elevated. This may allow the US dollar to sail further north.
Gold maintains haven status, rebounds from Tuesday’s lows
However, the war in Iran could start having a diminishing effect on the US dollar when investors are satisfied that they have priced in the proper rate path based on the current circumstances. This is when investors may seek shelter in gold again.
The precious metal was unable to stage a strong rally, mainly due to the dollar’s strength. However, after slipping on Tuesday, it entered a recovery mode on Wednesday and continues to grind higher today, even amid a rebound in the US dollar. This suggests that the metal maintains its safe-haven status and it may be a matter of time before we see it testing its all-time high of $5,598 again.
Stocks rebound on NYT report, but sentiment remains fragile
On Wall Street, all three of its main indices closed in positive territory yesterday, with the Nasdaq climbing the most, perhaps as investors decided to increase their risk exposure amid the New York Times report. Asian indices followed suit today with South Korea’s KOSPI rallying nearly 10%. European stocks also opened in the green.
Having said that though, there are no concrete signs that the tensions in the Middle East could ease soon, and the pre-war AI-related concerns may not have fully dissipated. Thus, there could still be scope for a further reduction in risk appetite and, thereby, another round of selling in equities.
by XM.com
