Dollar Gains as WTI Spikes on Middle East War

Besides WTI and Brent, the greenback has been one of the biggest winners since the start of US-Israeli airstrikes on Iran, raising the question of whether the gains will continue amid the economic fallout.

The Latest Developments

• Crude prices spike to almost $120 per barrel as the Strait of Hormuz remains closed for the seventh consecutive day.
• G7, IEA, and OPEC are considering releasing reserves to address the crude supply crisis.
• The dollar rises amid a crash in Asian stock markets, as the Far East is most vulnerable to Hormuz closure.
• Iran's hardliners consolidate power and threaten to attack oil infrastructure in the region in retaliation for Israeli strikes on fuel depots in Iran.

Crude Spikes, but Retreats on Release Rumours

Markets are reacting to developments in the war in Iran over the weekend, with risk assets lower across the board and the dollar rising amid safe-haven flows. Crude prices spiked at the open, with Brent rising to just shy of $120 per barrel, after Israeli strikes on Iranian fuel storage facilities spooked markets and Iran threatened to retaliate against oil production facilities across the region. Multiple companies in the Persian Gulf declared force majeure amid the inability to get crude through the Strait of Hormuz. Qatari officials warned that if shipments did not resume soon, production in the oil fields would have to be suspended, a halt that could take weeks or months to resume. Already, the UAE and Kuwait have reduced production, and it's expected that most producers in the region will declare force majeure in the coming days, with analysts warning that this could push crude prices as high as $150 per barrel.

Crude prices settled down after reports that the IEA and G7 countries were considering coordinated crude reserve releases to mitigate price pressures and will meet on Monday. An unnamed US official was quoted as saying 300-400 million barrels would be appropriate (compared to around 180 million released in the wake of Russia's invasion of Ukraine). Around 14.5 million barrels per day transited the Strait of Hormuz, implying the releases would compensate for a little more than a month of supply constraints. In a sign that the Iran war might be prolonged, the "Assembly of Experts" appointed Mojtaba Khamenei the new Supreme Leader, replacing his father.

Dollar Gains Against Major Currencies

The increase in oil prices has raised concerns of a global recession, as financial markets in the Far East reel from the war's effects. Over 80% of the crude regularly exported through the Strait of Hormuz goes to Asia. Refineries in Singapore are already facing shortages, and the price of diesel, an essential component of industrial energy supply, has spiked across the region. The gold ETF saw the largest drain in more than a decade as market participants sought liquidity amid falling Asian markets. Investors have been piling into the dollar given its relative security, as the US is a net crude exporter.

The potential impact of higher crude prices on inflation has left markets now pricing in two ECB rate hikes this year and one from the BOE. Markets are slightly more hawkish about the Fed, expecting no rate cut before July. However, the prospect of monetary tightening has also weighed on the price of gold and on the US dollar. The surprisingly negative NFP report on Friday, which showed 92K jobs lost and a rise in the unemployment rate, didn't do much to dent the dollar's advance.

As the disruption of oil supply is seen as the main driver of dollar strength, what authorities do to assure supplies amid the crisis and how soon the Strait of Hormuz reopens could be pivotal for how the greenback evolves in the coming days.

USDJPY Reaches Neckline Resistance Shy of 160

USDJPY has been advancing for the past four weeks and since its technical rejection of the middle VWAP line currently at 155.00. Following a long-term double bottom pattern, prices increased to the neckline near 159.00, which has formed short-term resistance. Shy of the 160.00 handle and closer to the prior high of 162.00, a breakout could see prices revisit the critical levels. However, a failure to confirm a neckline breakout could signal a peak, especially since a spike higher could form RSI divergence and potentially trigger BOJ intervention.