Oil/Dollar is not the only match-up that is changing

Markets are abnormally choppy as the Fed inherently self-contradictory statements and Trump can’t make up his mind as the war keeps going on. We can understand equities flailing but if investors are in need of a safe haven, why is gold falling?

As expected, the SNB took rates to zero with negative in the offing. Norway cut rates, the Bank of England is on hold. We like to think central banks are responsive only to their inflation mandates but go back and see the ING comment on the Norge Bank under Key Events—the cut was motivated by the threat to the exchange rate.

Another geopolitical effect—the price of oil. Reuters points out “… we're still far from 'shock' territory. Dollar-based global crude prices have jumped about 14% since early last week, but they remain well below January peaks and about 7% lower year-over-year.

But the impact has been even more benign in Europe, due to the euro's 12% rise against the dollar in the year to date.” See the chart. Oil prices in euro terms is much nicer—"still down 12% in 2025 and is 20% lower than one year ago.”

Oil/dollar is not the only match-up that is changing. As we have seen, the correlation of the dollar to the stock market has become stronger. In decades past, it was a negative correction. Now the dollar moves in lockstep with the S&P, which is not more explainable than the inverse relationship. Just as the dollar/oil link is coming apart at the seams, so is the traditional relationship with both stocks and bonds. Long-run, this is “destabilization” and bodes ill for the dollar.

The new Reuters database is declining to deliver the 10-year yield to us but here is the St. Louis Fed version—divergence between the yield and a dollar index.

While the Iran situation may be delivering some safe-haven appeal to the dollar, we have to ask if it can be long-lasting when every decent economist on the planet is calling for a capital exodus out of US assets and the dollar. Boy, does this mess up forecasting. 

Forecast: Delay in deciding whether the US will participate in attacks on Iran is a dollar-booster, as US-in-war tends to be. If Trump goes ahead with that one specific bombing, the effect gets erased---as long as Iran does not retaliate against US assets in the region, (personnel numbers some 40,000).

Iran might be restrained from keeping that retaliation promise by a new threat from Trump to flatten Tehran. He has been practicing to play the psycho strongman and may be believed.

Or Trump can chicken out and tell Israel, “Sorry, Congress won’t let me.” He may be loathe to chicken out after the TACO charge.

Our guess—Trump is going to send the bunker-busters to annihilate the mountain nuclear facility.

If today were not a US holiday, which confuses things, we might be inclined to reverse direction and go long dollars. Two of the three possible outcomes support that view and so do the indicators. The problem with reversing to a long dollar stance is the same as the reason to have gone short in the first place—Trump’s impulsive, reckless, uninformed decisions.

Trading FX today and probably tomorrow would be betting on the card-count being accurate. The only sane advice is to stay out. 

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