Dollar Gets a Boost as Traders Scramble for a Safe-Haven Play

The U.S. dollar is finding a firmer footing in a flight-to-safety play and may do so as long as Egypt remains in turmoil.

Protestors stand with a soldier as he waves an Egyptian flag on an army tank in Tahrir Square on January 29, 2011 in Cairo, Egypt.
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Protestors stand with a soldier as he waves an Egyptian flag on an army tank in Tahrir Square on January 29, 2011 in Cairo, Egypt.

The path after that, however, is less clear.

"Basically, the markets are very wary and cautious as we open up for trade," said Boris Schlossberg of GFT Forex.

"We're mildly anti-risk," he said. The dollar was higher against the euro and yen in early Sunday evening trade. The euro was at 1.3580.

"I think the issue ahead is really whether this is the sort of a political movement that's contagious across the Middle East," said David Gilmore, strategist with Foreign Exchange Analytics. "The point is: Does this skip to Saudi Arabia, Libya or some other country run by an autocrat that has oil? Then if it does, it's a story that has the potential to drive the dollar a lot higher — and oil a lot higher."

"But oil trading at $90, heading towards $100and with probably a chaotic situation in Egypt for a few weeks — it's going to keep the oil price pretty well supported," Gilmore said. "So, the question is what's that going to do to the U.S. economy and the global economy? ... The last thing we want to see is an oil shock."

Gilmore said as of now, the dollar may have priced in as much as the current situation warrants when it moved higher on Friday. "I just think it kind of got priced in Friday. If anything, the most remarkable thing over the weekend is that (Egyptian President Hosni) Mubarak is still in power," he said.

Mubarak declared that he was in control on the country and said he would fire his cabinet Friday, on the fourth day of protests. The protests grew larger over the weekendand became more violent, as crowds demonstrated but looters terrorized citizens. Mubarak named his intelligence head to the new post of vice president.

Schlossberg said the next steps will be critical and a worst-case scenario could reverse the global recovery. ""Egypt is a linch pin. There's been 30 years of cold peace, and even though it's been cold, it's been very stabilizing for the region," he said.

"It may be dollar-positive just on risk-aversion flows ... If you have a highly religious regime take over in Egypt, that's a very negative development," he said. Besides the political implications, Egypt is strategically important for its control of the Suez canal, a major shipping artery.

Schlossberg said the safe-haven currencies — dollar, yen and Swiss franc — should see inflows but so should the oil-influenced Canadian dollar and Russian ruble.

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