Geopolitical uncertainty shifts focus to US dollar, oil and gold markets

The Middle East conflict has shaken markets, shifting dynamics across the US dollar, oil and gold and highlighting growing fragility and complexity amid elevated global uncertainty.

Traditionally, the US dollar and oil prices have often exhibited an inverse relationship, with oil prices tending to soften when the dollar strengthens, and vice versa. Since the outbreak of the conflict, however, both the dollar and oil prices have risen simultaneously. At the same time, the historically inverse relationship between the US dollar and gold has been reinforced, with the dollar’s ascent mirrored by a slide in gold. It marks a turnaround from the pre-conflict period, following a period of extended dollar weakness and sustained gold strength.

Gregor MA Hirt, CIO, Multi Asset at Allianz Global Investors, commented, "Geopolitical shocks are now interacting with deeper structural shifts in the global economy, altering the forces driving gold, oil and the US dollar."

Hirt noted that oil is now trading as a geopolitical supply risk asset. Oil’s surge of around 60% in March reflected a significant threat to supply caused by blockages to the Strait of Hormuz and disruptions to energy production in the Middle East. Higher oil prices have contributed to inflationary pressures globally, further reinforcing the upward trend in energy prices.

Turning to currencies, Hirt said the US dollar has regained its safe haven appeal at least in the short term and has also benefited from higher energy prices. Because the US is now a major net oil exporter, higher energy prices tend to improve the US terms of trade relative to many peers and tighten global financial conditions, both of which favour the dollar in the short run. The dollar has also been supported by carry trades, where investors take advantage of higher expected US interest rates compared to other major economies.

By contrast, gold’s perceived status as a politically neutral asset that can serve as a refuge in a crisis has been tested. In the short term, gold is behaving more like a tactical asset, sensitive to liquidity, yields and positioning rather than headline geopolitical risk, as it has slid along with other normally risk-off diversifiers, including equities and bonds, in a correlation crunch. In part, the underperformance reflects investors cashing in on the metal’s strong run to build cash reserves or to cover margin calls on equity positions. Also, it seems that some central banks may have sold large volumes. It may also reflect anticipation that central banks will have to raise interest rates to counter the inflationary impact of higher energy prices. Higher interest rates mean higher bond yields, making fixed income a more enticing alternative to gold in the eyes of some investors.

Hirt added that with volatility rising across markets, including currencies, commodities and equities, short term price moves may be driven as much by flows and positioning as by fundamentals. He encouraged investors to look through current market dynamics and focus more on medium term factors.

From an asset allocation perspective, AllianzGI maintains a constructive outlook on commodities, including oil, supported by an elevated risk premium that allows commodities to provide a geopolitical hedge in portfolios. The duration of the disruption will be key to determining how long oil prices remain high.

On currencies, AllianzGI continues to expect a softer US dollar over the longer term, reflecting fiscal pressures in the US and gradual diversification away from the country’s assets. While near term dynamics have turned more supportive, Hirt does not expect these factors will last. As a result, tactical flexibility in currency positioning remains essential, even where the strategic outlook points in the opposite direction. For non-US investors, maintaining some exposure to the US dollar has provided a degree of protection in the current environment, particularly as the European economy appears more vulnerable to the impact of the crisis, pushing the euro lower.

As for gold, AllianzGI continues to view its medium term outlook as shaped by structural shifts, including central bank demand, fiscal concerns and dedollarisation, as well as more traditional drivers – including a softening US dollar, a decline in real yields and retail investor buying. But for now, it is critical to watch shorter-term exchange-traded fund (ETF) flows from retail investors and technical signals to assess potential re-entry opportunities.

Overall, the recent market shakeout serves as a reminder that familiar asset relationships cannot be taken for granted. Geopolitical shocks are now interacting with deeper structural shifts in the global economy, reshaping market dynamics and underscoring the need for tactical flexibility, as well as the need for investors to build resilient portfolios that are not necessarily reliant only on historic correlations.

Re-disseminated by Wealth and Society