Dollar banknotes. [Getty Images]
Dollar banknotes. [Getty Images]

Investors are rushing into the dollar as geopolitical tensions in the Middle East escalate again, with the US-Iran truce showing signs of collapse. President Donald Trump's suggestion that the United States could launch additional airstrikes on Iran drove the dollar higher for a second consecutive day, while bullish bets on the greenback reached $40 billion.

The Bloomberg Dollar Spot Index rose as much as 0.2 percent during trading Thursday, after Trump said further US strikes on Iran were possible, strengthening safe-haven demand. The index was on track to post its largest two-day gain in more than a week.

Market sentiment toward the dollar has been consistently improving. According to the US Commodity Futures Trading Commission, global investors' bullish dollar bets stood at around $40 billion as of June 30 — the most optimistic reading since 2015.

"The dollar still maintains its status as a safe-haven asset, and it benefits as geopolitical uncertainty grows," said Nathan Tufft, a senior portfolio manager at Manulife Investment Management.

Rising oil prices are also contributing to the dollar's strength. As the world's largest oil producer, and given that most international crude transactions are denominated in dollars, higher energy prices tend to drive up demand for the currency.

International oil prices surged as armed conflict between the United States and Iran intensified, raising tensions around the Strait of Hormuz. Concerns that crude shipments through the strait — which had shown signs of recovery — could face fresh disruptions added to upward pressure on prices.

Brent crude futures for September delivery settled at $78.02 a barrel on the ICE Futures Exchange on Thursday, up 5.20 percent from the previous session. West Texas Intermediate futures for August delivery closed at $73.52 a barrel on the New York Mercantile Exchange, a gain of 4.37 percent. Brent reached its highest level since June 19, while WTI hit its highest since June 22.

The dollar's rally has also been fueled by a more hawkish interest rate outlook. At his first Federal Open Market Committee meeting last month, Federal Reserve Chair Kevin Warsh signaled a strong commitment to price stability, shifting the expected policy path toward tighter monetary conditions than previously anticipated.

Interest rate swap markets are currently pricing in roughly 32 basis points of rate increases by year-end — implying one or two quarter-point benchmark interest rate hikes across the four remaining FOMC meetings this year.

However, Bloomberg raised the possibility that the dollar's gains driven by the renewed US-Iran tensions may not last. A sharp slowdown in job growth last month, revealed in recently released US employment data, has tempered expectations for Fed rate hikes and is limiting the dollar's upside.

"Middle East geopolitical tensions can lift the dollar, but the effect is likely to be temporary," said Brendan Fagan, a macro strategist at Bloomberg. He added that Trump's recent remarks at the NATO summit were more likely pressure tactics for negotiations than signals of actual policy change.

Eric Nelson, a foreign exchange strategist at Wells Fargo, said the dollar's rally may lose some momentum in the near term. "There are signs of fatigue in the recent rally," he said, adding that the probability of a rate hike in July has fallen compared with earlier expectations.


yckim6452@heraldcorp.com