Dollar Sidelined in Haven Rallies as Markets Weather War Strain

(Bloomberg) -- One of the world's major financial-market havens, the U.S. dollar, has been an unusual holdout to the rallies set off by an influx of cash into the safest assets.

Treasuries surged Monday, driving two-year yields near where they were before a steeper-than-expected inflation report earlier this month. The Swiss franc staged its biggest gain against the euro since 2018. And gold is holding near the more than 13-month high hit last week on the eve of Russia's invasion of Ukraine.

But the U.S. dollar, a favorite of currency traders seeking refuge during times of uncertainty, has failed to see significant gains. Even after advances during four of the last five trading days, a gauge of the currency's strength is still down nearly 1% since late January.

Analysts said the lack of big moves in the dollar shows that the conflict has yet to inflict the sort of global financial-market stress that would trigger a sustained retreat into the currency. While there are some signs of strains in short-term funding markets -- including widening spreads between future Libor and Federal Reserve rates and worsening Treasury market liquidity -- those haven't yet translated into a rush to buy dollars, Credit Suisse Group AG's Zoltan Pozsar said in a recent note.

A popular framework for currency traders known as the “dollar smile” theory suggests the greenback should outperform at times of either unusual strength or weakness for the U.S. economy. The war has complicated that analysis, though, with it still unclear how the global economy -- let alone relative rates of growth -- will be effected by the days-old war.

“It seems the market reaction still seems to be quite a bit localized and is more of a regional narrative,” said Simon Harvey, head of FX analysis at Monex Europe. “We're still seeing quite well-functioning global markets, which is why I don't think we're seeing the dollar go on too much of a rampage at the moment.”

The Bloomberg Dollar Index climbed about 0.2% on Monday but the currency was mixed its developed-market peers. The franc and its haven counterpart, the Japanese yen, led gains, along with commodity and risk-sensitive currencies like the Australian dollar.