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

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◎ Reporter Chen Jiayi

The U.S. and Israel’s attack on Iran has become a “black swan” that is disrupting global financial markets. Global capital quickly switched to a risk-off mode. The foreign exchange market has seen sharply diverging trends: currencies such as the U.S. dollar and the Swiss franc are rising, while emerging market currencies face some pressure.

Analysts believe that in the short term, assets and currencies related to safe-haven demand may benefit, which could mean the U.S. Dollar Index may strengthen. Looking at the medium to long term, if tensions in the Middle East continue and the U.S. faces heightened fiscal pressure and damage to the credibility of the dollar, the dollar could also face significant downside pressure.

On March 2, Beijing time, the U.S. Dollar Index opened with choppy upward movement and moved above the 98 level. As of 17:10 Beijing time, the Dollar Index’s intraday high rose to 98.5690, and the intraday gain at one point expanded to nearly 1%.

As a traditional safe-haven currency, the Swiss franc has also attracted inflows. On March 2, the euro-to-Swiss franc exchange rate at one point dropped to its lowest level in more than 10 years during intraday trading. As of 17:00 Beijing time, it was 0.9059. Morgan Stanley previously said in a report that the Swiss franc is “a safe-haven currency that holds up under the broadest range of scenario tests.”

At the same time, emerging market currencies are under clear pressure. Taking the Thai baht as an example, on March 2 during intraday trading, the Thai baht exchange rate fluctuated and trended lower. As of 17:00 Beijing time, 1 U.S. dollar was 31.4280 Thai baht, down more than 1% on the day.

Looking ahead, analysts generally believe that there is still considerable uncertainty in the Middle East situation, and the market may continue to operate with high volatility. In the short term, safe-haven sentiment may be difficult to fully fade, and currencies such as the U.S. dollar may continue to benefit from this, sustaining their strength.

CICC’s research report believes that in the short term, the U.S. Dollar Index may strengthen. Currencies and assets that may benefit in the short term include safe-haven-related gold and the Swiss franc, as well as the Canadian dollar and the Norwegian krone, which could benefit from higher oil prices.

Wang Xinjie, Chief Investment Strategy Specialist of Standard Chartered China Wealth Solutions Division, said that safe-haven currencies such as the Swiss franc and the Japanese yen are also expected to benefit slightly, while currencies of Asian net oil importers may weaken in the short term.

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

Beyond the impact on sentiment, the continued tensions in the Middle East may affect global energy supply chains. Data shows that on March 2, international oil prices opened higher. Brent crude opened up sharply by about 13%, to $82 per barrel; WTI crude jumped in early trading to $75 per barrel.

The market is concerned that if rising oil prices push inflation back up, it could disrupt the existing monetary policy paths of central banks in various countries. “For the U.S., if oil prices surge, although it would be profitable as an oil exporter, domestic price and inflation risks would cast a shadow over the economic outlook, and the Fed’s rate cuts may be further delayed.” Chen Jieri, a senior analyst at Gain Capital, said.

A research report from Soochow Securities said that in the medium to long term, if events evolve toward further loss of control—especially if the Strait of Hormuz is continuously blocked—this would repeat an oil-shipping supply shock that drives oil prices sharply higher, leading to a surge in inflation, and forcing global major central banks to raise rates to rein in inflation.

On March 19, the Federal Reserve, the Bank of Japan, the Swiss National Bank, the Riksbank, the Bank of England, the European Central Bank, and others will release their latest interest rate decisions. At that time, central banks’ analyses and judgments regarding geopolitical politics, the macroeconomic situation, inflation conditions, and other factors will become an important reference for investors as they try to gauge their policy paths.

Based on the latest forecast data, investors have already begun reevaluating the Fed’s rate-cut path. The CME Group “FedWatch” tool shows that investors have trimmed their bets on a Fed rate cut in June. The current probability of keeping the rate unchanged in June is 52.1%, higher than 42.7% on February 27.

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