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Iran Tensions Good News for Dollar?

The crisis in the Middle East and North Africa has raised fears over access to the Suez Canal.

Bill and cash
Bill and cash

The canal is important for transport of Asian goods to Europe and vice versa and with 50 huge ships a day passing through the canal, it carries 7.5 percent of total world trade a year.

On Tuesday two Iranian war ships sailed up the Suez Canal in a move that has angered Israel and raised fears that Tehran is planning to use the current crisis to flex its muscles in the region.

The language coming from Tehran does nothing to ease these fears as witnessed by comments from a leading general late on Tuesday.

"The Zionist regime (Israel) was shocked by the presence of Iran's naval ships in the Suez Canal and this is the reason that the regime has made propaganda in this regard over recent days," Iran's Deputy Army Commander Brigadier General Abdul-Rahim Mousavi told IRNA on Tuesday.

"The global arrogance should know that Iran's Army is fully ready to defend the ideals of the Islamic Republic," he added.

"Today, Iran's Army is among the strongest armies in the region and the world," he emphasized.

Tensions with Iran have failed to worry global investors until now but the prospect of Iranian warships in the Suez Canal on a regular basis could see tensions rise further.

It remains to be seen if such actions would have any impact on shipping passing through the canal but those using the strategically important corridor between Asia and Europe are concerned.

Nils S.Andersen, the CEO of AP Moller Maersk - which owns one of the biggest shipping operations on the planet - told CNBC on Wednesday that he is not worried about his ships being stopped from using the Suez Canal, which he reports is operating normally despite the problems in Northern Africa.

Iran and the Dollar

"Although Libya is understandably capturing the lion's share of attention at present, it would be wrong to ignore the fact that Iran has decided that this is the opportune moment to send a frigate and a supply ship into the Mediterranean for the first time since the Iranian revolution," said Simon Derrick from Bank of New York Mellon.

"With the removal of two leaders in North Africa that were seen as being sympathetic to the US (most notably Hosni Mubarak) and a civil war in a third, it seems that Iran is, literally, testing the waters to see how the political situation has changed," Derrick said.

Derrick has gone back through the history books to see how the dollar reacts to political tensions with Iran and found that if American troops are not involved in any problems, the dollar has in the past done very well when Tehran has been in the headlines.

"It is always dangerous to delve back into history in order to try and come up with simple overarching themes," he said.

"There were, after all, a myriad of factors driving the USD throughout the 1980s a 1990s." "Nevertheless, some consistent patterns do emerge over the past thirty years.

The first is that, in the absence of direct US military involvement, the dollar has tended to either stabilize or gain ground in the face of heightened Iranian activity," Derrick said.

"The second is that the risk that the US will need to become involved militarily has, usually, been a fairly direct dollar negative, a similar effect could be seen in the run up to Operation Desert Storm in early 1991," he pointed out.

"The third is that if the US does become involved militarily then a decisive move to ensure victory (e.g. Operation Praying Mantis in 1988 or the decisive completion of Desert Strom) has usually fed through into a stronger dollar as well," Derrick concluded.