Goldman Sachs reports the trade-weighted dollar has climbed by about 2% since the onset of the war with Iran. The firm links this advance to elevated energy prices and their effect on terms of trade across currencies.
According to the bank, market behaviour month-to-date indicates investors are placing greater weight on the inflationary impulse from higher energy costs than on the immediate hit to global growth. U.S. equities have shown resilience in this period, and Treasury yields have moved higher along the curve.
Late last week, however, the narrative shifted somewhat as recession fears gained attention. That development coincided with stronger performance from the yen and weaker showings from so-called high-beta currencies that typically benefit when energy prices rise. Goldman Sachs highlights the Canadian dollar, the Australian dollar and the Brazilian real as examples of those underperformers.
For its baseline outlook, Goldman Sachs assumes Strait of Hormuz flows will normalize by late April. The bank also observes that markets appear to be pricing in a rapid de-escalation. Nevertheless, it underscores that risks remain tilted toward higher prices and that global growth concerns could have a comparable market impact as inflation fears if normalization does not occur.
In terms of positioning, Goldman Sachs recommends short EUR/USD as an effective hedge against rising natural gas prices, reflecting recent market moves. It also advises short EUR/CHF, noting that the Swiss National Bank is likely to be less motivated to counter further franc strength if elevated inflationary pressures persist, so that hedge should be more effective than it was in the initial days of the shock.
Looking beyond the near term, the bank expects the dollar to weaken over time. Still, it cautions that the current phase of strength may continue until the energy shock clearly appears to be winding down rather than escalating. Goldman Sachs further notes that if recession risk becomes the dominant concern, the yen is likely to revert more decisively to its usual inverse relationship with risk sentiment, and USD/JPY should decline.
Sectors and market areas affected: energy markets, foreign exchange markets, equity markets and government bond markets, as reflected in moves in yields and currency crosses.