Euro slides as Middle East uncertainty lifts dollar toward 100

Safe-haven demand for the dollar is reasserting itself as US-Iran fighting resumes, complicating the Federal Reserve's inflation fight.

The euro fell against the dollar Monday as investors sought safe-haven US assets after fighting between the US and Iran resumed, keeping the greenback near the 100 threshold on the dollar index.

"The turnaround in Fed policy expectations this spring, coupled with safe-haven demand, continue to underpin the value of the USD and limit downside potential," Jane Foley, senior foreign exchange strategist at Rabobank, said.

The dollar index fell 1.5% to 99.7 in July, its first monthly decline in two months, after climbing 0.8% in May and 2.3% in June. Brent futures jumped more than 20% last month after attacks on several tankers around Oman heightened security concerns, while spot gold held near $4,030 an ounce.

A stronger dollar pressures eurozone exports and could weigh on European equities, while higher energy prices reinforce expectations the Fed will keep rates higher for longer to combat inflation, weighing on non-yielding gold.

The dollar's resilience comes as the Fed's credibility is under scrutiny. Three officials dissented at last week's policy meeting in favor of a rate hike, arguing that delaying higher borrowing costs could keep inflation above the Fed's 2 percent target. New York Fed President John Williams said the central bank was ready to raise rates if inflation pressures did not ease.

Piotr Matys, senior foreign exchange analyst at In Touch Capital Markets, said Warsh's reluctance to commit to rate hikes in advance and his remarks at the press conference "left many confused, and even stunned," undermining the bank's credibility and driving down the value of the dollar.

"By assuming that the markets will do the heavy lifting for him in bringing inflation sustainably in line with the official target, Warsh could be playing a very risky game that could end up with yields on US Treasuries getting out of control if volatility rises significantly," Matys said.

Cross-asset fallout

Gold has been stuck in a trading range for more than a month, roughly between $4,000 and $4,200, as the market expects a resurgence in inflation, said Edward Meir, an analyst at Marex. Spot gold fell 0.3% to $4,029.84 an ounce Monday, while US gold futures for August delivery dropped 0.5% to $4,029.00. Spot silver fell 0.8% to $57.18 an ounce, platinum slid 1.6% to $1,616.42 and palladium dropped 1.8% to $1,251.16.

Iran said Monday there were no talks under way with the US and no plans for any meetings, contradicting President Donald Trump, who had cited talks he said would take place as justification for calling off attacks. Market participants will watch a series of US jobs reports this week, including the ADP employment report and nonfarm payrolls data, to gauge the Fed's policy path.

What's at stake

The dollar's strength has direct consequences for the eurozone. A sustained rally in the greenback makes eurozone exports less competitive and could pressure multinational earnings, while higher energy prices feed through to inflation across the bloc. South Korea's central bank said Monday it will buy gold from local producers to diversify its sources of supply and increase its holdings of the precious metal.

Matys said Warsh could mitigate the risk to the dollar by supporting a rate hike in September. "It's important to stress that central bank credibility is an important pillar of support for any currency, especially when it comes to a major reserve currency such as the dollar," he added.

This article is for informational purposes only and does not constitute investment advice.