The dollar sees a rebound after US strikes Iran, but can it continue?
The dollar rose on Monday as uncertainty over the Israel Iran conflict persisted following US strikes on Iranian nuclear facilities over the weekend.
By around 2.45 CEST, the Dollar Index had risen 0.61% in daily trading to 99.31.
Over the month, it showed a 0.19% increase, although its year-to-date value was still down almost 9%, failing to win back losses linked to erratic policies from the Trump administration.
US President Donald Trump said that the weekend strikes had caused 'monumental damage', although some Iranian officials downplayed the impact. The full extent of the damage could not immediately be determined by the UN's nuclear watchdog.
Israel — meanwhile — continued with its strikes on Iran on Monday, while Tehran vowed that it would 'never surrender to bullying and oppression'.
Several nations warned Iran against a retaliatory closure of the Strait of Hormuz, a shipping lane responsible for around 20% of global oil and gas flows.
'In this morning's trading session, the dollar staged an expected rebound. The demonstration of US military strength, as well as the fear of higher oil prices, weakened the euro,' said ING economists in a note.
Higher oil prices would likely drive up inflation and discourage the US Federal Reserve from cutting rates in the near future. This would spell bad news for US consumers but would simultaneously increase the dollar's attractiveness to investors.
'Looking ahead, one of the key questions is whether US involvement in the conflict could restore the dollar's safe-haven appeal. Here, a crucial factor will be the duration of any potential Strait of Hormuz blockade. The longer such a blockade lasts, the higher the likelihood that the value of safe-haven alternatives like the euro and yen is eroded, and the dollar can enjoy a decent recovery,' said ING economists.
The greenback's value has dropped significantly this year as policies from the Trump administration have spooked investors, damaging the currency's status as a safe-haven asset.
Signals worrying investors are not solely linked to trade policy, but also include a high US deficit, the cost-slashing bureau DOGE, sudden cuts to foreign aid, withdrawals from international treaties, and the prospect of financial deregulation.
Greg Hirt, chief investment officer with Allianz Global Investors, told Euronews that 'structural issues around a twin deficit and the Trump administration's volatile handling of tariffs should continue to weigh on an overvalued US dollar'.
Even so, he noted that the 'short term potential for higher oil prices will likely affect the Chinese and European economies to a greater extent, as they are more dependent on oil imports than the US'.
Ryan Sweet, chief US economist at Oxford Economics, reiterated this point, noting that 'the US economy is essentially energy independent but others are not, including Japan as it imports most of its oil from the Middle East'.
Sweet told Euronews that dollar gains are positive but still muted as 'currency markets are in a wait and see mode'.
There is also significant uncertainty around President Trump's tariff deadline, with a 90-day pause on so-called 'reciprocal' duties set to expire on 9 July.
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