President Donald Trump on Sunday said the US Navy would start blockading the Strait of Hormuz, a choke point for 20% of the world’s daily energy supplies that Iran effectively closed since the war started in late February. That has driven oil prices up by over 30% and fuelled fears of a widespread surge in inflation.
The dollar, which has acted as a safe haven given the limited exposure of the United States to imported energy-price inflation, rallied as Asian markets opened for trading, leaving the euro down 0.53% at US$1.1663 and gaining 0.1% against the Japanese yen to trade at 159.43.
The US and Iran on April 7 announced a two-week ceasefire that investors initially cheered by selling oil and putting some capital back into risk assets such as stocks. Concern over the fragility of the deal has since prompted an unwinding of some of those trades.
“This is an absolute unwinding of any optimism heading into the peace talks into that play of dollar: safe-haven; oil jumping and selling out of everything else,” City Index senior market analyst Fiona Cincotta said.
“On the other hand, we have seen the markets over-exaggerate sometimes. And I think especially around this scenario, the market is struggling to really price it correctly, because there is so much uncertainty, so many unknowns.”
More risk-sensitive currencies such as the Australian dollar and sterling came under heavy pressure, falling 1.1% and 0.5%, respectively.
With expectations building for a resurgence in inflation, investors have priced in the possibility of several central banks, such as the European Central Bank and Bank of England, leaning towards raising interest rates this year, in stark contrast with expectations prior to the war for borrowing rates to remain unchanged or fall.
Global equities, which ended last week around their highest since early March, buoyed by optimism that the United States and Iran were heading towards some kind of resolution, are still 2% below where they were prior to the war breaking out.
Gold has lost about 10% in value since late February, as investors see the dollar as a better safe-haven right now.