Are there safe?haven assets in today's world? The conflict in the Middle East has slammed gold prices. US Treasuries have been sold off en masse. The Japanese yen is so weak that the government is forced to employ regular verbal — and hinted — currency interventions. The franc feels out of place. At first, the American dollar stood out, but as the situation around Iran unfolded, it has lost its shine.

G10 currencies vs the US dollar

Indeed, as soon as Donald Trump announced a five?day ban on strikes against Iran's energy infrastructure and spoke of negotiations, the greenback was swept into a wave of selling amid an improved global risk appetite. But let's face facts. US and Israeli military operations continue. Saudi Arabia is ready to join a coalition. The Strait of Hormuz is blocked. Iran insists there are no negotiations with the United States.

There is no talk of de?escalation. Yet the US dollar is looking unwell. It is being battered, and this process began with the meetings of central banks that compete with the Fed. The ECB and other regulators are worried about the threat of stagflation — the combination of slowing growth and high inflation. They are using decidedly "hawkish" rhetoric, which is forcing the futures market to revise its views.

Forecasts of central bank's interest rate

Before the war, derivatives were pricing little from the ECB and even two cuts to the Bank of England's repo rate. By late March, the situation had turned upside down. It is now forecast that Frankfurt and London could raise rates almost three times. Unsurprisingly, German and UK bond yields are rising much faster than their US equivalents. That puts pressure on the US dollar and offsets the positive effect of its safe?haven status.

Although Christine Lagarde says the eurozone economy is in good shape and can withstand the Middle East shock, the ECB chair is clearly being misleading. In 2022, when inflation surged and the ECB delayed hikes, the economy was stronger. GDP growth then rested on pandemic?era fiscal and monetary stimulus. That support is not there now.

Interest rates are high, domestic demand is weak, and business activity has slowed to a 10?month low. In such conditions, tightening monetary policy is close to economic self?harm. It is unlikely the eurozone can withstand further rate increases in the current environment. Eventually, the ECB may have to reverse course.

Technically, on the daily chart, EUR/USD sees a fierce battle between bulls and bears around the fair value level of 1.161. A victory for buyers would open the way north for the euro. Conversely, if sellers prevail, it will create an opportunity to build short positions.