Cash is king as war lifts oil and dollar, sinks stocks, gold, bonds

“Cash” has become the most prized asset in global markets as the conflict in the Middle East intensifies, triggering a rare sell-off in gold, bonds and equities at the same time and reshaping what investors see as traditional hedges.

The US dollar has stood out as the preferred safe haven, while Brent crude climbed to US$83.60 a barrel.

Gold slid as much as 4% after hitting a four-week high on Monday, reflecting what traders described as “indiscriminate” selling.

The Bloomberg Dollar Spot Index rose more than 1.3% this week, marking the dollar’s strongest weekly advance in nearly a year, while most major currencies tracked by Bloomberg weakened.

Michael Arone, an analyst at State Street Investment Management in Boston, said: “Oil and the dollar are the only two things people want to own right now.”

Dollar reasserts its haven role

Pairez Upadhyaya, an economist at Pioneer Investments, said the dollar is acting as a safe haven as investors turn risk-averse amid uncertainty over global growth and inflation.

The surge in demand is easing doubts that had resurfaced about the dollar’s role as the world’s dominant reserve currency, as investors conclude that nothing replaces the dollar in moments like this.

Before the United States and Israel began striking Iran over the weekend, most markets had been positioned for a weaker dollar.

Bloomberg data compiled from the CFTC up to February 24 showed investors holding bets for dollar weakness worth nearly US$1.9 trillion.

David Wagner, an analyst at Aptus Capital Advisors, said investors are watching market behaviour closely because US Treasuries can no longer be relied on as a hedge in the way they were in the past.

Offshore dollar squeeze grows

Global markets are also facing a shortage of dollars outside the United States.

A measure known as the cross-currency basis, which reflects the extra cost investors pay to swap local currencies into dollars offshore, has widened sharply — signalling surging demand for dollar liquidity versus currencies such as the Swiss franc, euro and pound.

Investors pile into “cash-like” funds

LSEG Lipper data showed global money-market funds took in US$47 billion, the largest inflow since February 17, as investors sought refuge in short-dated, cash-like instruments.

By contrast, investors cut exposure to equities, pulling US$9.6 billion from US-focused equity funds, while global equity funds saw US$9.1 billion of outflows on Monday — the biggest daily withdrawal in more than two months.

More upside for the dollar?

Options markets suggest expectations have flipped, with investors increasingly positioning for a stronger dollar and the cost of betting on further gains rising.

Skylar Montgomery Koning, an analyst at MLIV, said the dollar is a clear beneficiary of the conflict, both as a safe haven and because the United States is an energy exporter, while other major economies remain energy importers.

Historical patterns around oil-supply shocks also suggest there is room for the dollar to strengthen further.

Source: Bloomberg