The US Dollar (USD) experienced a tumultuous start to the week, with its index declining as Wall Street opened bullishly on Monday, only to end the day in negative territory. The currency faced significant pressures from escalating geopolitical tensions in the Middle East and a brewing tariff war between the European Union and the United States. Additionally, the USD demonstrated contrasting performances against various global currencies, weakening notably against the New Zealand Dollar while strengthening to a two-week high against the Japanese Yen, trading above 149.70.
Geopolitical Tensions Weigh on the Dollar
The USD was heavily influenced by rising tensions between the US and Iran, which contributed to a surge in safe-haven assets like gold. The precious metal reached record highs beyond $3,000 early Tuesday, reflecting investor concerns over potential conflict escalation. These geopolitical jitters were exacerbated by recent US airstrikes on strategic locations in Yemen, including the Red Sea port city of Hodeidah and Al Jawf governorate north of Sanaa.
US President Donald Trump's stern remarks holding Iran accountable for any attacks carried out by the Houthis further fueled market anxieties. Meanwhile, Israeli Prime Minister Benjamin Netanyahu's office announced the resumption of military operations against Hamas in the Gaza Strip.
"From now on, Israel will act against Hamas with increasing military force," stated Netanyahu.
These developments contributed to a volatile environment for the USD, as investors sought refuge in safer assets amid heightened risks.
Market Reactions and Economic Indicators
The geopolitical landscape heavily impacted the USD, contributing to its decline against major currencies. The currency's performance was further affected by a dip in US stock index futures, which lost between 0.2% and 0.3% during the European morning session on Tuesday. This downturn was accompanied by a brief spike in 40-year government debt yields to record highs, reflecting investor uncertainty.
The USD's movement was also influenced by the US Central Bank's decision to bolster its reserves with 1,136 tonnes of gold, valued at approximately $70 billion, in 2022. This move underscored the growing demand for gold as a hedge against geopolitical instability and inflationary pressures.
On the European front, economic sentiment data from Germany and Euro area trade balance readings provided additional insights into market dynamics. These indicators played a crucial role in shaping investor expectations and influencing currency valuations.
Contrasting Currency Performance
The USD exhibited varied performance across different currencies, highlighting its complex interplay with global markets. While it struggled against the New Zealand Dollar, it managed to gain strength against the Japanese Yen. This divergence can be attributed to differing economic trajectories and market sentiments in these regions.
The New Zealand Dollar benefited from robust domestic economic indicators and a relatively stable geopolitical environment, allowing it to capitalize on the USD's vulnerabilities. In contrast, the Japanese Yen faced headwinds from domestic economic challenges and investor preference for higher-yielding assets.
In addition to these factors, the ongoing EU-US tariff war added another layer of complexity to currency markets. The trade dispute has implications for global supply chains and economic growth prospects, further influencing investor sentiment and currency valuations.