Safe haven or false start? Dollar rally unraveled

Financial markets are spooked by Operation Epic Fury, but the dollar's remarkable rise says less about geopolitical fears than it does about oil. How robust is this unexpected recovery, really?

Operation Epic Fury is reverberating strongly across financial markets. Oil prices are soaring, risky stocks are taking a hit, and in the currency world, players are seeking protection in safe havens like the Japanese yen, Swiss franc, and US dollar. The latter was the biggest winner last Monday morning. During previous geopolitical shocks, the yen and especially the franc stood out in this regard. Financial players seemed to be avoiding the dollar more in light of President Donald Trump's unpredictable (trade) policies. Last Monday's impressive jump raises the question of whether the cards have suddenly been reshuffled. The short answer is "no." The dollar's rally is not so much the result of increasing geopolitical uncertainty, but primarily of the rising oil price.

Key lessons from the dollar rally
The economies of Switzerland, Japan, and the eurozone rely heavily on imported energy. The United States, on the other hand, has become one of the largest oil exporters over the past decade. On the one hand, this provides a valuable lesson for Europe in the importance of reducing energy dependence on external suppliers. But if you look at the currency market through this lens, there's every reason to question the strength of the dollar's recovery. These doubts are only heightened when you consider that the Swiss franc's rise was slowed earlier this week by the central bank's hint at currency intervention. The yen struggled as the Bank of Japan slowed its pace of interest rate hikes.

June 2025 repeat?
Although Trump briefly hinted at a ground operation in Iran and said the largest wave of attacks was yet to come, the most likely scenario is that the United States and Israel will announce within one or two weeks that they have achieved their objectives. This would be a repeat of the June 2025 attack on Iranian nuclear facilities. At that time, oil prices also soared, only to plummet back to their starting levels when the fighter jets remained grounded. If this happens again, the dollar appears vulnerable. The number of short positions, through which traders speculate on a dollar decline, has risen sharply in recent months. One reason is that Trump's nominee, Kevin Warsh, will take over as Fed chairman from Jerome Powell in May.

Good for the economy, not so good for the dollar
Both Trump and Warsh appear intent on pushing the policy rate down. This is positive for the US economy, but less favorable for the dollar. Moreover, many countries remain concerned about the significant influence the United States wields on the international financial system through the dollar. The dollar's share of global reserves has fallen from 71% to 57% since 2001. It will be a long time before another currency can challenge the dollar. But if the conflict in Iran is over and oil prices retreat, the dollar could be far more vulnerable than the recent rally suggests.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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