Sagarika Jaisinghani, Anya Andrianova, Macarena Muñoz and Ruth Carson
12 min read
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(Bloomberg) -- The dollar strengthened in early trading as investors sought to shield against mounting geopolitical risks following the US strikes on Iran.
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The US currency saw modest gains against the euro and most major foreign-exchange peers as markets opened for the week in Asia. Crude oil futures jumped and US equity contracts slipped as the bombing fueled demand for safety and angst about energy supply. Treasury futures were little changed.
“This increased-risk environment will drive investors toward safe-haven assets,” said Ahmad Assiri, a market strategist at Pepperstone.
In another early sign of risk aversion, Bitcoin slid below $100,000 for the first time since May and Ether sank sharply as cryptocurrencies posted broad-based declines.
Market reaction had been generally muted since Israel’s initial assault on Iran earlier this month: Even after falling for the past two weeks, the S&P 500 is only about 3% below its all-time high from February. And a Bloomberg gauge of the greenback is up less than 1% since the June 13 attack.
That’s mostly because investors have expected the conflict to be localized, with no wider impact on the global economy. But moves stand to get bigger if Iran responds to the latest developments with steps such as blocking the Strait of Hormuz, a key passage for oil and gas shipments, or attacking US forces in the region, market watchers say.
“It all depends on how the conflict develops, and things seem to be changing by the hour,” said Evgenia Molotova, a senior investment manager at Pictet Asset Management. “The only way they take it seriously is if the Strait of Hormuz gets blocked because that will affect oil access.”
Iran has vowed to impose “everlasting consequences” for the bombing and said it reserves all options to defend its sovereignty. Meanwhile, Israel resumed its assaults, targeting military sites in Tehran and western Iran.
“This marks a turning point for markets,” said Charu Chanana, chief investment strategist at Saxo Markets in Singapore. The “question is whether US assets can still command a safe-haven premium.”
Still, downside is likely to be limited because some market participants have been preparing for a worsening conflict. The MSCI All Country World Index has pulled back 1.5% since Israel attacked Iran on June 13. Fund managers have reduced their stock holdings, shares are no longer overbought and hedging demand has increased, meaning a deep selloff is less likely at these levels.
