US Dollar Forecast: DXY Rises on Middle East Tensions, Oil Surge

The U.S. Dollar is trading higher against a basket of major currencies on Monday, driven by a jump in energy prices and increased safe-haven demand as investors react to escalating Middle East tensions. The dollar surged on the weekly chart following U.S. and Israeli bombing strikes inside Iran, with the situation intensifying throughout the weekend as Iran claimed to have hit at least three U.S. and British oil tankers.

Global traders are starting to price in the impact of a prolonged war with the possibility of the closing of the Strait of Hormuz, potentially shutting down up to 25 percent of world oil production. With the death of Iran’s Supreme Leader Ali Khamenei, the fight to take control of the government is intense and could be contributing to the fury of Iran’s counter-attack on area U.S. naval bases and surrounding Arab neighbors. Whatever leadership is left to call the shots may feel the end is near and could start blasting all the missiles they have, further threatening oil supply in the area.

The situation is not expected to defuse for weeks, which is driving investors into the safe-haven U.S. Dollar. During situations like this, global investors also tend to seek protection in U.S. Treasuries, but this has been the case with the U.S. 10-year Treasury note yields edging higher in early trading.

However, countries heavily reliant on crude oil imports, particularly Japan and the Euro Zone, are at extreme risk due to the possibility of a sustained rise in oil prices. Meanwhile, the U.S. economy is not expected to feel similar problems since the U.S. is a net crude exporter.

U.S. Dollar traders will also be monitoring the reactions by the major central banks. Early in the session, the Swiss National Bank said it was prepared to intervene in the FOREX markets and the Bank of Japan said that extreme financial market volatility will not stand in the way of its plans to raise interest rates.

At this time, Barclays analysts are saying the greenback could strengthen by 0.5-1.0 percent for every 10 percent jump in crude oil prices.

On the weekly chart, the trend is down according to the long-term swing chart and the 52-week moving average. However, the minor trend indicator is showing a shift in momentum to the upside.

The DXY is currently testing a short-term retracement zone at 97.973 to 98.545, the last potential resistance area before the 52-week moving average at 98.957. Overcoming this indicator will further strengthen momentum, perhaps triggering an acceleration into the swing top at 99.492.

More Information in our Economic Calendar.