Was the dollar's recent sharp run higher against a backdrop of conflict in the Middle East a pure geopolitical safe-haven play? Not quite, some say.
The greenback surged more than one percent against most other major currencies on Monday as Israeli warplanes pounded Lebanon, with most analysts citing safe-haven buying as investors sought solace from riskier assets.
Classic safe-haven gold also gained sharply, along with oil prices reaching record peaks, but some analysts say the dollar's movements were more indicative of asset re-allocation due to the substantial accumulation of long euro positions.
This is more of an asset allocation shift than a safe haven shift. The big asset allocation shift that will buoy the dollar is from riskier markets to defensive ones. The geopolitical situation is really just accelerating that trend, Steven Pearson, chief currency strategist at HBOS Treasury Services said.
A Merrill Lynch poll released earlier on Tuesday showed that 72 percent of fund managers responding to its monthly survey now expect the global economy to weaken over the next 12 months compared with 61 percent in June.
People have closed their underweights in U.S. and UK equities. It is totally consistent with negative growth surprises, said David Bowers, a consultant to Merrill Lynch.
The euro has gained almost 6 percent against the dollar so far this year, due to expectations that dollar-boosting interest rates rises will end soon -just as the European Central Bank revs up its tightening cycle.
HBOS' Pearson said the market was experiencing a transition into a slower global growth environment after searing rallies in emerging markets and commodities related to major economic driving forces such as China's rampant growth.
Gold prices hit their highest in 26 years in May above $700 an ounce.
As global growth slows and volatility rises, holding positions in those markets becomes less and less attractive - and the rebalancing favors the dollar, he said, adding he expected dollar strength to build over this year.
CRISIS - A USEFUL EXCUSE
Dale Thomas, head of currency management at Insight Investment, said the Middle East crisis seemed to serve as a useful excuse to jettison stale positions.
The most likely situation is that the foreign exchange market place has built up substantial underweight U.S. dollar positions and is simply in the process of shedding them as the underlying dynamic is, in my opinion, not as dollar negative as most people think.
Thomas also noted that the Swiss franc, one of the strong safe-haven assets, had not performed well in the midst of the dollar's rally.
The dollar gained 1 percent against the Swiss franc
The Swiss currency has been sought in the past as a safe store as it does not typically need a lot of overseas funding.
I do think there has been an element of safe-haven trade going on, the rise in the gold price can be entirely attributed to people seeking safe havens, but even that has faltered, Thomas said.
Oil prices have been particularly sensitive to the Middle East conflict as almost a third of the world's oil comes from the region.
Prices ratcheted up to an all-time high in excess of $78, and are currently hovering close to that level around $75. Sky-high oil prices could hit the dollar hard due to hefty U.S. dependence on energy.
When it comes to the Middle East this time round, I'm not so sure that the dollar is a safe haven, particularly when they (U.S.) are involved in some way or another in the conflict itself, said Stephanie McClennon, portfolio manager at Avebury Asset Management.
Typically the dollar hasn't benefited in times where oil prices are expected to escalate - it's not necessarily good for the U.S. economy.
Foreign exchange markets returned to normal fundamental themes on Tuesday, with economic data the main impetus.
In reality, what's going on in Israel and Lebanon is not going to make much difference to currency markets as things stand unless it broadens out more, Insight Investment's Thomas said.