The escalating situation in Bahrain could put further downward pressure on the US dollar, reports Caxton FX, as the crisis in the Middle East continues to deteriorate. The rise in oil prices has had a deprecating impact on the US currency, with the market concerned about the knock on impact for US economic growth. As the turmoil in Bahrain threatens to deepen and spread to neighbouring Saudi Arabia, there is only one direction for the price of oil to go.
Duncan Higgins, senior analyst at Caxton FX, said: “We could see sterling trade higher against the US dollar in coming weeks as oil prices head north. The civil unrest in the Middle East is escalating and it only needs to spill over into Saudi Arabia to send oil spiralling higher.
“With the earthquake and damaged nuclear reactor in Japan, paired with civil unrest in the Middle East, it is no surprise that market sentiment remains highly risk adverse. The US dollar, once the primary safe haven currency, has failed to capitalise on the situation – and other factors have served to keep the greenback under pressure. As focus shifts from Japan, the spotlight will likely come to rest over the political turmoil in the Mideast, putting the US dollar back in the firing line.
“The market doesn’t appear too interested in holding dollars at present – this has elevated the Swiss franc to the safe haven currency of choice. Under this risk-off environment there is little to suggest that the franc’s uptrend will slow,” he added.
Looking further ahead, dollar weakness may be compounded as interest rate differentials remerge to dictate market movement as they did earlier in the year.
Higgins concluded: “Broad uncertainty over the global economic outlook has stemmed the dollar’s downtrend; but I think it will resume in the longer term as the Fed are set to remain a long way behind the interest rate curve.”
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