Dollar Edges Higher as Middle East Tensions Persist, Safe-Haven Flows Remain Intact
The dollar index (DXY00) ticked up 0.07% on Tuesday, holding onto modest gains as geopolitical risks in the Middle East continued to underpin safe-haven demand. The U.S. March trade deficit came in narrower than anticipated, providing an early lift, while renewed skirmishes near the Strait of Hormuz kept investors cautious.
According to the U.S. Central Command, American forces repelled drone and missile attacks from Iranian-backed groups on Monday while escorting two U.S.-flagged vessels through the strategic waterway. The incident underscored the fragility of the current ceasefire and kept the dollar bid as a refuge asset.
“The situation in the Strait is a powder keg. Every time there’s a lull, someone lights a match,” said Mark Chen, a currency strategist at a London-based hedge fund. “The dollar is the only game in town when the Middle East heats up.”
However, gains were capped by a 3% slide in crude oil prices, which eased near-term inflation expectations and fueled speculation that the Federal Reserve could maintain a dovish stance. Stronger equity markets also reduced liquidity demand for the greenback.
“Oil is collapsing, and that’s supposed to be good for the dollar? Not today. The market is reading it as a sign of slowing demand, which could push the Fed to cut rates sooner,” said Linda Torres, a former Fed economist now consulting for a New York asset manager. “The dollar rally is running on fumes.”
Data released Tuesday painted a mixed picture. The U.S. trade deficit widened to -$60.3 billion in March from -$57.8 billion in February, but came in below the -$61.0 billion consensus estimate. The ISM services index slipped to 53.6 from 54.0, slightly missing the 53.7 forecast, while the prices paid subindex held steady at 70.7, below expectations of a rise to 73.5.
On the housing front, new home sales surged 7.4% month-over-month to an annualized 682,000 units, beating the 652,000 estimate. JOLTS job openings fell to 6.866 million, a smaller decline than the 6.850 million anticipated.
Swaps markets are currently pricing in just a 7% probability of a 25-basis-point rate cut at the Federal Reserve’s June 16-17 meeting.
In currency pairs, EUR/USD edged up 0.08%, supported by the drop in oil prices, which benefits the energy-importing eurozone. The euro’s gains were limited by the dollar’s resilience. Markets see a 93% chance of a 25-basis-point rate hike from the European Central Bank at its June 11 meeting.
USD/JPY rose 0.33%, with the yen under pressure from a stronger dollar and reduced safe-haven demand amid rising equities. Losses were tempered by lower oil prices, which benefit Japan’s energy-dependent economy. Trading volumes were thinner than usual due to Japan’s Children’s Day holiday. The Bank of Japan’s next policy meeting on June 16 carries a 64% implied probability of a 25-basis-point rate hike.
In precious metals, June COMEX gold climbed $50.10 (1.11%) to settle higher, while July silver added 0.448 (0.61%). The decline in crude oil prices eased inflation fears, reinforcing expectations of looser monetary policy globally—a bullish signal for gold and silver. Heightened Middle East tensions also boosted safe-haven demand for the metals.
“Gold is back in fashion because nobody trusts the ceasefire, and the tariff uncertainty isn’t going away,” said James Okonkwo, a commodities trader in Dubai. “Silver is just along for the ride, but at least it’s moving.”
Upside in metals was tempered by a stronger dollar and firmer equities. Still, underlying support remains from U.S. tariff uncertainty, political turmoil, large fiscal deficits, and broader policy unpredictability, all of which bolster gold’s appeal as a store of value.
On the bearish side, fund liquidation continues to weigh on sentiment. Long holdings in gold ETFs fell to a 4.5-month low on March 31, after hitting a 3.5-year high on February 27. Silver ETF longs dropped to an 8.75-month low on Monday, following a 3.5-year peak on December 23.
Central bank demand remains a key pillar for gold. The People’s Bank of China added 160,000 ounces to its reserves in March, marking the seventeenth consecutive month of accumulation. Total bullion held now stands at 74.38 million troy ounces.
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com.