US Dollar Forecast: DXY Rises as Euro Weakens on Growth Fears, Tensions Boost Demand

Dollar Climbs as War Fears Drive Safe-Haven Demand

The U.S. Dollar moved higher against a basket of major currencies on Monday as global tensions supported safe-haven demand for the greenback. The Euro and British Pound fell, which gave the Dollar Index (DXY) a boost because of their heavy weighting in the index. The Forex markets are reacting to the escalating war involving the U.S., Israel and Iran, with oil prices rising sharply.

Oil Above $100 and Europe Is Feeling It Most

The surge in both Brent and WTI crude oil above the psychological $100 level is creating major concerns about inflation, but more importantly, it is raising fears about slower growth outside the United States. I believe that the shift in thinking is the new key development. When global growth starts to look weaker, especially in Europe, the dollar tends to benefit as global investors move toward relatively stronger, more stable economies.

Looking at Monday’s price action from the dollar’s perspective, the weakness in the foreign currencies was clearly supportive. The Euro dropped nearly half a percent, while the British Pound fell even more and hit its lowest level since late November. What this is telling us is that investors are pulling away from Europe due to growth concerns tied to higher energy costs. But at the same time, the U.S. stands in a better position since it is a net energy exporter.

The Yen Was the Exception — But Don’t Count on It

The Japanese Yen, on the other hand, was the exception on Monday. It strengthened after Japanese officials warned they could step into the market at any time to prop up the Yen. Nonetheless, if we take the broader currency flows into consideration, the numbers still favor the USD/JPY. An intervention at this time could drive the Forex pair sharply lower over the short-term, but over the long-run it is eventually absorbed.

Safe-Haven Buying Is Doing the Heavy Lifting

I said earlier that safe-haven buying was behind the dollar’s rally. I based this on the drop in Treasury yields across the curve. The 10-year yield is highly correlated with the movement in the dollar. So when yields go down and the dollar goes up, it’s usually because of safe-haven buying.

The drop in yields was blamed on dovish comments from Fed Chair Jerome Powell, who calmed trader fears about a rate hike. Powell’s remarks led to a drop in rate hike odds, but still the dollar held its ground, supporting my premise that safe-haven buying likely underpinned the Greenback today.

Manufacturing and Jobs Data Could Keep the Dollar Elevated

Later this week, traders will eye data on manufacturing and jobs. If the data comes in solid, then this should keep the dollar elevated because it would reduce the chances of a rate cut.

More Information in our Economic Calendar.