JPMorgan is optimistic about the US dollar for the first time in a year due to "prudent insurance"

Source: Global Market Report

As the Middle East conflict pushes up energy costs and threatens global economic growth prospects, JPMorgan Chase FX strategists are bullish on the dollar for the first time in a year.

“Time has now become the enemy of macroeconomic outlooks: the longer energy prices remain high, the deeper and more lasting the drag on markets,” wrote Meera Chandan and Arindam Sandilya, leading the JPMorgan team, in a report on Friday. “With both bond and equity markets under pressure, the dollar has become the best defensive asset among various asset classes.”

In just two weeks, due to U.S. and Israeli airstrikes on Iran, oil prices surged to historic levels, completely overturning investors’ expectations for inflation and economic activity this year. Despite the dollar strengthening against the 16 major currencies tracked by Bloomberg, U.S. Treasuries and U.S. stocks declined simultaneously.

Analysts point out that the near-closure of the Strait of Hormuz, a key oil shipping route, is a critical factor behind JPMorgan’s shift in dollar stance. Currencies of economies closely linked to global oil prices—such as the dollar, Canadian dollar, and Australian dollar—have outperformed other currencies since the outbreak of war. The euro and Asian currencies face the greatest risks.

JPMorgan states that their bullish view on the dollar reflects “cautious insurance,” rather than high confidence in the dollar’s fundamentals. The bank recommends traders hold dollars rather than a basket of energy-dependent currencies like the euro, British pound, and Swedish krona.