(Bloomberg) — By at least one metric in the $9.5 trillion foreign-exchange markets, demand for the dollar is ebbing amid the tenuous ceasefire between the US and Iran.<\/p>\n
Measures of the so-called cross-currency basis \u2014 the extra cost investors pay or receive when sourcing dollars overseas instead of the US \u2014 show a steady waning in appetite for the greenback in recent days, particularly against the euro and Swiss franc.<\/p>\n
\u201cThis is a simple reversal of the dollar trade,\u201d said Nathan Thooft, a senior portfolio manager at Manulife Investment Management. \u201cIt was one of the few beneficiaries of the crisis as it developed, and now as there are signs of de-escalation that bid is reversing course.\u201d<\/p>\n
But while the basis is indicative of the global investor appetite for US cash, it\u2019s not a forward-looking measure of what the dollar will do next. Predicting that is a different task altogether, especially in a market primed to move on the latest war headlines and comments from President Donald Trump.<\/p>\n
\u201cIt is really difficult to anchor views and portfolio positioning to a single macro narrative right now,\u201d said Thooft, chief investment officer of the firm\u2019s equities and multi-asset solutions teams managing $309 billion.<\/p>\n
In the spot market Friday, the dollar fell after March US consumer inflation data showed headline prices growing the most in nearly four years amid a surge in gasoline costs \u2014 but the core measure of inflation, which excludes food and energy impacts, rose 0.2% on the month, below expectations.<\/p>\n
\u201cAll else equal, this puts less pressure\u201d on the Federal Reserve, Patrick Locke, a currency strategist at JPMorgan Chase & Co., said after the data. That will \u201ccompound the drag from the ceasefire that already forced an unwinding of dollar risk premium.\u201d<\/p>\n
Bloomberg\u2019s measure of the dollar is now set for a 1.5% decline on the week, which would be the worst performance since January.<\/p>\n
What Bloomberg Intelligence Says…<\/p>\n
\u201cDollar bulls remain at the mercy of Iran developments into 2Q, with the April 8 price action after the two-week US-Iran ceasefire deal validating our assessment that the near-term dollar outlook is binary, with an end of the conflict taking us back swiftly to our bearish view from early 1Q.\u201d<\/p>\n
Audrey Childe-Freeman and Thinh Nguyen, BI Strategists. For the full note click here.<\/p>\n
The cross-currency basis market gauges how much it costs to exchange one currency for another beyond what is implied by borrowing costs in the cash markets. It effectively sets the price of foreign-exchange hedging for global investors and is an indication of flows between economies and asset classes.<\/p>\n
On Friday the six\u2014month euro basis tightened in favor of the single currency to a level last seen in early March. The Swiss franc\u2019s own gauge, meanwhile, is now at its most favorable in three weeks.<\/p>\n
Following the launch of US and Israeli strikes against Iran six weeks ago, these gauges rapidly moved in favor of the greenback \u2014 implying a rush for dollar funding as the spiraling Middle East war slammed global risk appetite.<\/p>\n
\u201cThe softening of headlines around the conflict have definitely helped risk sentiment and moderated dollar strength,\u201d said Jayati Bharadwaj, head of currency strategy at TD Securities.<\/p>\n
If the ceasefire holds, leading to a permanent easing in hostilities, Nomura strategists reckon a long-term trend of de-dollarization \u2014 a broad shift away from dollar-denominated assets due to factors like the US\u2019s unpredictable policymaking and fiscal deterioration \u2014 will re-emerge. The bank sees the greenback dropping 4% from current levels by year-end in that scenario.<\/p>\n
A fresh reading of speculative positioning in the currency markets, through April 7 ahead of the ceasefire announcement, will be released later Friday by the Commodity Futures Trading Commission.<\/p>\n
The cross-currency basis is driven by a wide range of factors, from geopolitical shocks to central bank policies and cross-border bond issuance.<\/p>\n
In the mix this week are soft funding conditions as cash continues to flood into short\u2011term US fixed\u2011income markets \u2014 a sign that dollar liquidity remains abundant and that investors have ample room to park cash in front\u2011end instruments.<\/p>\n
The shift against the dollar in the basis markets signals \u201ca partial return in risk sentiment,\u201d said Jack Boswell, a currency strategist at Wells Fargo in London.<\/p>\n
But just as important are tighter funding markets in Europe and the UK as the European Central Bank and Bank of England trim their balance sheets in contrast to the Federal Reserve, he added.<\/p>\n
That reflects \u201ca fundamental change in the FX swap market,\u201d Boswell said.<\/p>\n
–With assistance from Alexandra Harris and George Lei.<\/p>\n
(Adds market reaction to CPI report, preview of CFTC positioning report, comment from JPMorgan.)<\/p>\n