The Dollar turns the tables

The dollar index has gained nearly 2% from the lows of more than three years set earlier this month. Israel's bombing of Iran has caused a complete reversal in sentiment towards US assets.

Since the beginning of the year, pressure on the US dollar has intensified, and since April, there have been frequent episodes of simultaneous declines in the dollar and US stock and bond markets. Such a combination is rare in developed markets, as it implies distrust in the economy — a suggestion that was seldom raised in relation to America in the 20th century. The press also raised the issue of the US government's long-term solvency with unusual frequency, while gold appeared to be a safe haven.

However, it should not be forgotten that at that time, there were high hopes for a resolution to the Russia-Ukraine conflict and growing expectations that the threat of a trade conflict with the US would bring Europe and Asia closer together, undermining the US's negotiating advantage. As a result, all this reduced the risk premium on European assets. Now, this process has stopped and even reversed with the war in the Middle East, which threatens to destabilise trade flows and the energy market once again.

It is still difficult to characterise the situation as a flight to safety, as stock indices remain high. Rather, we are seeing capital moving towards the presumed winner. The United States is considered the default winner, as it has been for the last hundred years or so. Despite constant references to the readiness for negotiations, the parties are still escalating the situation, setting the stage for the development of current trends.

The technical picture also fits historical patterns. We previously indicated that the oversold conditions reached in April would lead to a renewal of lows, but the relative strength index may record a higher local low. A reversal usually follows this.

If this does happen, it will help to curb inflation and ease concerns in the US debt markets. However, this optimistic scenario for Trump has yet to receive technical support. In early May, the dollar index failed to consolidate above 100, which turned former staunch support into resistance. The ability to move higher this time will be an important signal. Even more relevant is the resistance in the form of the 50-day moving average, which has been in force since February.