"Protective asset status undermined": why analysts are biased against the US dollar

The growth of the U.S. dollar since the beginning of the war in the Middle East in late February will come to naught as its attractiveness as a protective asset weakens amid de-escalation of the conflict, according to currency strategists surveyed by Reuters. According to their estimates, the recent strengthening of the U.S. currency at the beginning of the war was largely due to the closure of short positions and does not reflect the sustained demand for the U.S. currency.

Since the start of the war in the Middle East, the dollar index has gained about 2% against a basket of 10 major world currencies. According to a Reuters poll of nearly 70 currency analysts conducted between March 27 and April 1, the U.S. dollar is expected to weaken gradually: the euro is expected to remain at its current level against the U.S. currency - $1.16 - by the end of April and June, before strengthening about 2% to $1.18 six months later, and another 2% to $1.2 within a year. In trading on April 2, the U.S. dollar rose slightly against the European currency, with one euro trading at $1.15. Also on April 2, the dollar index, reflecting its dynamics against a basket of major world currencies, jumped up (plus 0.53%). Such dynamics of the U.S. currency demonstrated against the background of statements of U.S. President Donald Trump about the possible escalation of the conflict in the Middle East and the return of demand in the market for protective assets, notes Reuters.

- "We are negative on the [US] dollar for several reasons. First, it is trading above its fair value, and a sharp and rapid reversal to long dollar positions already looks excessive," said Eric Nelson, head of G10 currencies strategy at Wells Fargo. While the U.S. may look more resilient to the crisis compared to Europe, Japan and other regions, including through its energy import structure, rising energy prices will still have significant indirect effects on the economy, he added. Combined with an already weak labor market in the U.S., this will only add to the pressure on consumers' real incomes, Nelson noted.

- "It is striking that whenever there is hope for a resolution of the conflict, the US dollar starts to decline very quickly. As soon as the situation normalizes and, say, oil drops below $90, the euro/dollar pair could exceed $1.18 almost instantly - at least if it [the end of the war] happens tomorrow," noted Stephen Englander, head of G10 currencies research at Standard Chartered. There is "not much enthusiasm" in recent dollar buying, he said. "Many unexpected moves by the Trump administration have [a] direct effect [on markets], but the indirect one is almost always an increase in the risk premium on US assets due to the widening range of uncertainty about possible policy reversals [by the US president]," the expert said.

- Derek Halpenny, Head of Global Markets Research in EMEA (Europe, Middle East and Africa) at Mitsubishi UFJ Financial Group, agrees with him: "We could expect the dollar to strengthen by 4-5% only on the background of oil prices rising by 60-70%. But so far this has not happened - the growth has been much more moderate. The dollar's status as a protective asset has been undermined to a certain extent," he noted.

The dollar's status as a defensive asset was already under pressure due to the chaos surrounding US President Donald Trump's imposition of duties last April, as well as concerns about the independence of the Federal Reserve, which have gone nowhere, Reuters notes. In addition, markets are closely watching every statement Trump makes on Iran, which oscillate between escalation and de-escalation of the conflict.

Oil prices have added 50% since the war began in late February, with gains as high as 65% at moments. On April 2, Brent futures jumped more than 7% to $108.57 per barrel after Trump's statements on Iran heightened fears of prolonged supply disruptions. U.S. WTI crude futures rose almost 8% to $108.

Against this background, since the beginning of the escalation of the conflict in the Middle East, traditional protective assets in general showed weak dynamics: the yields of U.S. Treasury bonds rose significantly, and gold fell in price by more than 10%, draws the attention of Reuters. April 2, gold quotes lost almost 3%, the precious metal is trading at $4625 per ounce.

This article was AI-translated and verified by a human editor