Is confidence returning to the Dollar?

The US dollar staged a three-day rally from its lowest levels since May against the backdrop of escalating trade tensions between the US and Canada, the imposition of sweeping sanctions by Washington against Iran, and the resulting fall in stock indices. Risk appetite fell, and with it, demand for the greenback as a safe-haven asset rose.

Scott Bessent launched Operation ‘Economic Outcast’ against Iran. It includes sanctions against more than 60 organisations, as well as monitoring every hub, intermediary and network that Tehran uses to smuggle oil and circumvent the imposed restrictions.

Brent reacted with a fall following a six-day rally, in line with the ‘buy the rumour, sell the fact’ principle. However, the long-term prospects of Iran’s isolation are negative for the oil market. This implies a further reduction in supplies, which will result in rising prices.

The question is: how will China react? China buys around 90% of its oil from Iran. Without China’s cooperation, cutting Iran off from the global oil market would be virtually impossible. At the same time, Beijing’s reluctance to compromise with the US risks triggering a new trade war and a slowdown in the global economy. This pessimistic scenario is driving investors to seek safe havens, and the greenback offers a refuge. At the same time, there is a growing realisation that the sanctions are based on the dollar-centred monetary system, which remains firmly in place.

Another cause for concern is the breakdown in negotiations between the US and Canada, which has led to the imposition of large-scale tariffs on Ottawa. Canada has promised to retaliate dollar for dollar, a move that risks further escalation. As a result, USDCAD recorded its best daily performance in two months.

Gold retreated from its recent highs amid profit-taking following a prolonged rally and the strengthening of the US dollar. Nevertheless, XAUUSD’s main trump card – the ‘debasement trade’ – remains in play, allowing the ‘bulls’ to wait for an opportunity to launch a fresh attack.

USDJPY has resumed its upward trend and is approaching the 160 mark, above which the risk of verbal and, subsequently, currency interventions will increase. The futures market is pricing in an 82% probability of a BoJ rate rise in September, and the numerous speeches by officials are unlikely to disappoint it.

Summary: The dollar rallied on Iran sanctions and US-Canada trade tensions, while Brent fell on 'sell the fact' dynamics. Gold pulled back, but the debasement trade remains intact, and USDJPY approaches the critical 160 level.