Oil-fueled surge… Dollar index nears 100

Energy importer Japan’s yen, once a strong safe haven, weakens

"FX markets will, for now, be driven by whether economies are energy-independent"

The dollar, which had extended its weakness since last year and seen its safe-haven status significantly erode, has roared back, jumping on the back of the US airstrikes on Iran. Unlike past episodes, this rally is seen as being largely driven by the US becoming a net oil exporter thanks to shale production.

On 3 (local time) in European trading, the ICE Dollar Index (DXY) rose 0.8% to 99.197. After gaining 0.9% the previous day, it is posting a two-day streak of outsized strength. It is the highest level since it briefly topped 100 intraday in early August last year. Reuters reported that the dollar’s sharp move higher after the US strike on Iran is less about traditional safe-haven demand and more about the impact from the energy sector.

Since Trump’s return to the White House last year, the US dollar has tended to weaken during periods of heightened market anxiety and volatility. That reflected unusually high uncertainty around US economic policy and political turmoil at home and abroad. As a result, so-called “debasement trade” positioning spread. The dollar’s role as a safe haven had been viewed as all but over.

The Trump administration has sought to preserve the dollar’s status while trying to reverse the multi-year stretch of dollar strength into dollar weakness, arguing that trading partners have artificially engineered currency depreciation. However, Reuters said the fact that the dollar has weakened even during global political or financial stress suggests that the behavior of foreign investors, who had been heavily overweight US assets, has also changed.

Reuters added that this rise in the dollar looks more like a natural shift away from currencies in economies expected to be hit hardest by higher energy prices.

In other words, the fact that the Japanese yen—more commonly traded as a safe haven than the dollar—fell after the strike reflects the damage Japan could suffer as it imports most of its energy needs, including oil and gas.

That is why the yen failed to attract safe-haven buying this time and slid more than 1% against the dollar on 2. The move reflected Japan’s massive energy import bill and the fact that nearly 70% of Japan’s crude oil imports pass through the Strait of Hormuz.

The Chinese yuan has faced a similar backdrop.

China, the world’s largest oil importer, is highly dependent on the Strait of Hormuz—importing about 80% of Iran’s crude export volumes. Iranian crude is cheaper due to Western sanctions, but uncertainty is growing over whether China can continue to secure these discounted supplies. The yuan had been on a sharp upswing recently, but fell 0.8% the previous day.

Kit Juckes, a currency strategist at Societe Generale, said the situation is “not friendly to Northeast Asian currencies,” stressing in particular that President Trump said the US strikes would take “weeks, not days.”

The US began full-scale shale gas production in 2011 and, from 2019, returned to being a net exporter in the oil trade.

In Europe’s case, 30% of its crude oil imports and 20% of its liquefied natural gas (LNG) supply come via the Strait of Hormuz.

Europe’s benchmark gas price briefly surged nearly 50% on 2 immediately after news that Qatar’s largest gas facility—supplying 6% of Europe’s gas imports—would halt production following a drone attack, before settling up 35%.

The euro fell 1% against the dollar, hitting its lowest level in about a month.

ING strategist Chris Turner, in an interview with Bloomberg, wrote: “In FX markets, the divide between those with energy independence and those without looks set to persist,” adding that “the dollar appears to be the currency best placed to benefit from an energy shock like the current one.”

The Swiss franc’s long-standing, at times unwelcome, status as a safe haven remains intact. However, the picture is becoming more complicated as the Swiss National Bank is fighting deflation and has reaffirmed its pledge to intervene by selling francs to curb appreciation.

Kim Jeong-a, contributing correspondent kja@hankyung.com