Forex Market: Capital Rushes to "Safe Havens" as Global Currency Trends Diverge

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◎Reporter Chen Jiayi

The U.S. and Israel attack Iran, becoming a “black swan” that disrupts global financial markets. Global capital quickly switches into risk-avoidance mode. The foreign exchange market shows a polarized trend: currencies such as the U.S. dollar and the Swiss franc rise, while emerging-market currencies face some pressure.

Analysts believe: in the short term, assets and currencies related to risk aversion may benefit, which means the U.S. Dollar Index could strengthen; in the medium to long term, if tensions in the Middle East continue, the U.S. faces increased fiscal pressure, damage to the dollar’s credibility, and other factors could also put the dollar under significant downward pressure.

On March 2, Beijing time, the U.S. Dollar Index opened with choppy trading higher, crossing above the 98 mark. As of 17:10 on Beijing time, the intraday high of the U.S. Dollar Index reached 98.5690, and the day’s gain at one point expanded to nearly 1%.

As a traditional safe-haven currency, the Swiss franc has also attracted capital inflows. On March 2, the EUR/CHF exchange rate fell at one point to the lowest level in more than 10 years; as of 17:00 on Beijing time, it was 0.9059. In a report earlier, Morgan Stanley said the Swiss franc “is a safe-haven currency that has stood up to the widest range of scenario testing.”

Meanwhile, emerging-market currencies are under clear pressure. Taking the Thai baht as an example, on March 2 during intraday trading, the baht fluctuated and moved lower; as of 17:00 on Beijing time, it was 31.4280 Thai baht per USD, down more than 1% on the day.

Looking ahead, analysts generally believe that the Middle East situation still contains substantial uncertainty, and the market may continue to operate with high volatility. In the short term, risk-averse sentiment in the market may be difficult to fully fade, and currencies such as the U.S. dollar may remain strong as they benefit from this.

A research report from China International Capital Corporation (CICC) says the U.S. Dollar Index may strengthen in the short term. Currencies and assets that may benefit in the short run include safe-haven-related gold and the Swiss franc, as well as the Canadian dollar and the Norwegian krone, which benefit from rising oil prices.

Wang Xin Jie, Chief Investment Strategy of Standard Chartered China’s Wealth Solutions Department, said that safe-haven currencies such as the Swiss franc and the Japanese yen are also expected to see slight benefits, while Asian oil-importer-country currencies may weaken in the short term.

However, from a medium- to long-term perspective, the dollar’s short-term safe-haven advantage may be difficult to sustain. A research report from Haitong Securities says that although the dollar has some safe-haven attributes in the short term, because the United States is at the “epicenter” of a global geopolitical reshuffle, the acceleration of the reconstruction of the global order will continue to erode the dollar and the dollar assets’ dominant position in the medium to long term. The U.S.-led joint attack with Israel on Iran will further accelerate the erosion of the dollar system’s credibility, and the trend of de-dollarization may continue.

Beyond the impact on sentiment and disruptions, the continued tension in the Middle East may affect the global energy supply chain. Data show that on March 2, international oil prices opened higher: Brent crude opened up about 13% to $82 per barrel; WTI crude initially jumped to $75 per barrel.

The market is concerned that if rising oil prices push inflation back up again, it could disrupt the existing monetary policy paths of central banks in various countries. “For the United States, if oil prices surge, it would be profitable as an oil exporter, but risks to domestic prices and inflation would cast a shadow over the economic outlook, so the Federal Reserve’s rate cuts may continue to be delayed.” Chen Jierui, a senior analyst at Gain Capital Group, said.

A research report from Soochow Securities states that in the medium to long term, if events unfold further toward a loss of control—especially if the Strait of Hormuz is continuously blocked—this would replicate the supply-shock scenario in oil shipping that leads to a spike in oil prices, which then triggers a surge in inflation, forcing major global central banks to raise rates to curb inflation.

On March 19, the Federal Reserve, the Bank of Japan, the Swiss National Bank, the Riksbank (Sweden), the Bank of England, the European Central Bank, and others will release their latest interest-rate decisions. At that time, the analysis and judgments by central banks on geopolitical issues, the macroeconomic environment, inflation conditions, and more will become an important reference for investors to infer their policy paths.

Based on the latest forecast data, investors have begun reassessing the Federal Reserve’s rate-cut path. The CME Group “FedWatch” tool shows that investors have reduced their bets on a June rate cut. Currently, the probability of keeping rates unchanged in June is 52.1%, higher than 42.7% on February 27.

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Editor-in-charge: Shi Xiuzhen SF183